There’s a good reason Mankiw doesn’t have a feedback or comments link on his page, because he’d certainly get an earful from the non-Harvard professor economists who understand that his premise is full of shit. Of course, anyone who carries water for the modern GOP is clearly a liar and a coward…

The whole supply-side/ cut-every-tax policy for economic growth is such B.S. am disappointed, though not surprised, that the media continues to pretend it’s a serious argument. If any of them bothered to check GDP per capita throughout U.S. history, they would easily see that there is NO connection between tax rates and economic growth. None at all.
Reagan cuts (income) taxes, we have the eighties boom. Clinton raises income taxes and we have the longer nineties boom. Bush II cuts taxes and we have anemic growth followed by a heinous crash. Back when we had no income taxes, and therefore by their logic should had astronomical growth, real GDP per capita was almost flat (mild growth followed by crippling panics).
So once more to the media, low taxes≠high growth. Period.

I’m not entirely sure who takes their quarter-million dollar salary, then goes on to start a corporation in which their entire salary is taxed again at the corporate tax rate, then receives the same salary as capital gains, then does this for so long without spending any money that he saves up $3.5 million dollars (or $7 million if he’s married) after a supposed 93% marginal tax rate strips away almost all of their gains from their income

You forgot looking around the country to see which state/city combo has the highest combined rates of state income tax/state and-or local sales tax/local property tax and then moving there.

Your opening does not make sense.  You say “doing everything in your power to pay as many taxes as possible on that money”

Do you mean “doing everything in your power to pay as few taxes as possible on that money?”

That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.

Holy shit!  Under John McCain, we’d be living under an 83% tax policy!  What crazy mindless soulsucking communist state has McCain been devising?!  Good thing we didn’t suffer under such tragic monetary policy in previous administrations.  Oh - wait - current tax rates are HIGHER than McCain’s plan?  Ye-mother-fucking-gods?!  We’re getting fleeced!  Absolutely fleeced!  How am I supposed to feed my wife and kids when the government is milking me for 83% of my income in T years?!

You forgot looking around the country to see which state/city combo has the highest combined rates of state income tax/state and-or local sales tax/local property tax and then moving there.

I bet if you crunched the numbers right you’d actually be paying more tax than you picked up in income.  Through in property taxes and vehicle registrations and we could conceivably prove it costs money to make money in certain states.  :-p How oh how does America stay in business?

Your opening does not make sense.  You say “doing everything in your power to pay as many taxes as possible on that money”

It makes sense if you keep reading:

“On the other hand, if you’re a sane person and structure your income so that you pay fewer taxes on that income, regardless of the rate, things will turn out much better for you. “

Ah ha!  I was just ranting about Mankiw in the comments section of another blog that posted his stupid article, and then I come over here!  What a tool! Thank you for posting it as well.

Greg Mankiw is not upper middle class, he’s rich.  His introductory Econ text makes him a huge amount of money (he got a seven figure advance to do the first edition) plus likely $200K or so in Harvard salary.

Greg Mankiw is not upper middle class, he’s rich.

My friend, don’t you know that America is a *middle class society*? There’s no such thing as rich or poor in America…

there’s “lower middle class” and “upper middle class”.

@Rob

$5 million, is what I heard the advance was for that $&#* textbook.  Despite being (so I’m told) more widely distributed than many textbooks, it cost $90 when I bought it, and that was 5 years ago.

I nearly threw the thing at the wall when I got to the section about how rent control is eeeeeeeevil.  Mankiw is such a Bush-toadying, slime-wallowing dick.

I love this last line from Mankiw’s post

They will be poorer when they grow up, but perhaps they will have a few more happy memories.

What the fuck? Is it me, or is he mocking the idea that children might prefer spending more time with their parents to receiving a larger estate share?

Speaking as a father, if I pass away and my son wishes my estate had been larger more than he wishes he could have spent additional time with me, then it’s safe to regard me as a failure as a father. And speaking as a son whose father passed away almost twenty years ago and who was left nothing because THAT’S THE WAY IT IS FOR MOST OF US, if someone gave me the choice of money or more time with my father, I would take more time without a moment’s hesitation.

But hey. I’m not a member of the “upper middle class”, so what do I know.

MikeEss, you might be my favoirte Pandagonian Commenter of Election ‘08.

I think I now know why the American economy is in trouble.

Wasn’t it Manciw a few years ago who got in a bit of trouble when—speaking as an adviser to the Bush administration—he explained that outsourcing was good because it created unemployment in the U.S. which would lead to greater competition for jobs, driving down wages, thus making capitalism more profitable and therefore it will all work out for the best in the end! 

He appears to not actually live amongst human beings.

Is that image a depiction of the common i’m-at-school-but-i’m-naked dream or some rare economics/social science fetish porn?

The picture on this post could be considered sexist, anti-semitic, ableist, and fat-phobic.

You should be ashamed of yourself, Jesse!

...
...

KIDDING!

If you’re already clearing $250K in income and are concerned about the implications of an Obama administration, my carefully-considered economic policy prescriptions are twofold:

1) Stop Feeling Sorry for Yourself.
2) Shut the Fuck Up.

He appears to not actually live amongst human beings.

That was the impression I got from his textbook.  I recall (don’t have it handy so I can’t check) a chart illustrating the flow of money/capital/value in a great circle of wealth.  It just happened to exclude anyone who didn’t own property outright.  Renters just simply didn’t exist in his glorious vision of the ownership society.

Another flaw I noticed: terrible sourcing.  By contrast, I took Econ 101 at the same time as Psych 101.  The psychology text was about 1/4 footnotes and endnotes.  Every paragraph had at least 2 or 3.  Not a single normative statement was made without citing at least a couple of different studies to back it up.  His econ book, otoh, would constantly make flat assertions with no citation at all.  And some citations were of dubious value: for example, he asserted that minimum wage increases always raise unemployment.  The citation was of an opinion survey of economists that showed 70% of economists believe it to be true.  Not exactly definitive proof, that.

Oh, and that psych text cost about 1/3 the price of Mankiw’s book/worthless workbook combo.

If Mankiw were right, one of the things conservatives would be clamoring for is much slower phaseouts of means-tested government benefits as income increases. There are lots of benefits (food stamps, heating assistance, medicaid etc) that either have a hard cap or a dollar-for-dollar reduction in benefits after you reach a certain income level. If you’re eligible for several different programs your effective marginal tax rate could be way over 100%, possibly over 500%.  But no, that’s not a bug, it’s a feature.

Mr. Mankiw fails to take into account the following factors in his simplified calculations:

1) He fails to account for the increased taxes his children will need to pay due to the massive deficit spending of a future Republicon administration.
2) He fails to account for the lower rate of return that his savings will accrue due to the Republicon market performance gap.
3) He fails to account for the possibility that his children might suffer from gaps in employment due to bad job creation during Republicon adminstrations.
4) He fails to account for the massive increase in lifetime enjoyment that his children would get if their father was a human being instead of a human asshole.

Of course low taxes result in astronomic growth and prosperity!
It works in the exact same way that eliminating the possibility of legal same-sex marriage greatly strengthens heterosexual marriages and reduces divorce…
Or the way abstinence-only sex-ed eliminates teen pregnancy…
Or how massive bombing of a civilian populace increases democracy and freedom…

Mike, you fool, it is obvious that if you have 100% taxes, economic activity ceases.  Therefore low taxes must be correlated with growth!

It works in the exact same way that if every man was married to Barney Frank, the human race would die out, and therefore only allowing heterosexual marriages is good.

Or the way that we’d have a massive amount of teen pregnancy if we mandated gang rape from the age of puberty, and therefore abstinence-only sex ed is the only way.

Or that if nobody ever died, we’d all become so crowded that no-one would ever be able to get into a polling booth, and thus dropping bombs and killing people is necessary for democracy.

THAT’S the sort of situation Greg is trying to warn us about.

Used Makiew’s book in my summer econ class a few years back.  Even the Prof who taught the course disagreed with some of his assertions and attempted to bring in counterexamples and alternative arguments in the intro econ class. 

If you’re already clearing $250K in income and are concerned about the implications of an Obama administration, my carefully-considered economic policy prescriptions are twofold:

1) Stop Feeling Sorry for Yourself.
2) Shut the Fuck Up.

Agreed. 

Most of the fiscal cons/libertarians I happen to know, however, will point to that response as proof that Obama and his supporters are “dirty commies” who want to force everyone to have the exact same income regardless of level of skill, competence, and work ethic among individuals…providing more incentive for slacking rather than excelling at one’s work. 

The reasoning has a bit of plausibility as that was exactly the situation in many State Owned Enterprises(SOEs) during the Maoist era.  Relatives and neighbors who worked in those factories during the 60’s and 70s recalled those institutions provided no incentives to do more than meet the minimum quotas beyond coercive threats because everyone received the same guaranteed pay and welfare benefits regardless of the efforts put forth.  If anything, the only route to getting increased pay was to become a political hack who kisses up to the local party cadres and loudly rattles off Maoist slogans du jour.  If one didn’t want to go through the trouble and risk of becoming a Maoist kissup/political hack, they just did the bare minimum they could get away with….which can include sleeping the workday away if one was in good graces with the local cadres. 

That was a factor in the Chinese state’s efforts to privatize/dissolve SOEs during the first decade of Deng Xiaoping’s market reforms during the mid-80s - early ‘90s as the excessive overstaffing, guaranteed welfare benefits, and attitudes/habits they cultivated during the Maoist era caused them to be unable to cope with market competition and was costing the state too much to maintain. 

Last I checked, Obama and his supporters were not calling for implementing such a hidebound economic system as the Maoist one outlined above. 

If anything, my Marxist friends are angry with Obama and some of his supporters precisely because he is “too damned pro-business”.

Where is that image from?

Right-click on it, select Properties, and all will be revealed unto you

Mankiw ought to use some of the spare time he will get from not working so hard under the new socialist Obama regime to volunteer down at the local homeless shelter.  There, he can tell everyone how he is getting the short end of the stick.

These people are disgusting.

Jesse and the Pandagon commentators v. a Harvard economics professor. Which party is anti-intellectual, again?

To Histrogeek, your history doesn’t exactly disprove the basic economic point Mankiw’s making. There are lots of differences between the 80’s and 90’s; you don’t even try to control for other factors. You also fail to realize economic effects are often time-delayed. Reagan gradually brought down the Carter tax brackets, which the 90’s economy thankfully was not saddled with.

FlipYrWhig misses Mankiw’s entire point. It’s not that you should feel sorry for Mankiw (and he explicitly says he’s well off). It’s that as a result of higher taxes, he’s going to work less, which means he’s going to be less productive, to the detriment of society. That’s true of everyone whose taxes are raised, whether they be huge meanie corporations, small businesses, or rich individuals.

This is not a difficult point to grasp. It’s covered in the first few chapters of any elementary economics textbook, not just Mankiw’s. Taxes pervert incentives and create deadweight losses. Sometimes that’s an acceptable cost to bear for other reasons. But you might want to explain why that’s so in the case of Obama’s plan, rather than making fun of someone who actually passed Economics 101.

I passed economics 101, using Mankiw’s textbook.

From my reading of the link, his incentive to work should remain the same- but his incentive to invest would go down- yet, in his hypothetical, he puts his 1 Mankiw Dollar through the ringer of every form of taxation in the economy- which is an exercise in sophistic bullshit. 10$ says that when Obama is elected and his tax plans put into effect, Mankiw will still be out there, doing his thing. His personal Laffer point is damn far away from a 6% increase in capital gains.

FlipYrWhig misses Mankiw’s entire point. It’s not that you should feel sorry for Mankiw (and he explicitly says he’s well off). It’s that as a result of higher taxes, he’s going to work less, which means he’s going to be less productive, to the detriment of society.

Gee, Bob, two teeny tiny minor problems:

i, Mankiw’s scenario was about as accurate a reflection of taxes in the real world as your Roger Moore era James Bond movie is a documentary about intelligence work. Oops.

ii, Less taxes, higher government deficits - to the detriment of society.  Oops.  Why, it’s almost as if we need to strike a medium between what society needs and what individuals need.  And, lo, in the range the US uses, there’s very little demonstrated correlation between taxation and economic growth.  There’s considerably more between, say, deficits and growth, or income equality and growth.

So, let me see - what we have is an unrealistic scenario trotted out to justify a comment that can’t be backed up with any realistic real world evidence.

Sounds stock in trade for Republicans.  Cf War, Iraq.

Which, incidentally, has to be paid for out of taxes, Bob.

I want to point out, thought, that Bob has revealed a fundamental misunderstanding of “anti-intellectualism.” Anti-intellectualism would be saying “man,  Mankiw teaches at Harvard. He mustn’t know anything!” Alternately, and also foolish, one could say, “man, Mankiw teaches at Harvard. He must know everything!” The intellectual, or, more simply, intelligent point of view would be to say “man, Mankiw teaches at Harvard. So what? Let’s talk about his ideas.”

I think that again, this betrays a fundamental misunderstanding, not only of the specific term “anti-intellectualism,” but more generally of how analytical, non-dogmatic thought works. Where Mankiw teaches does not matter. What matters is what he says, how he justifies it, and how it matches up to reality.

From my skimming, it would seem that if Mankiw works less, society actually benefits, because it doesn’t have to deal with his bullshit.

You’re revering that hotbed of ultra-radical MarxoLiberalism “Harvard”?  Something’s fishy…

MikeEss,

That’s so funny considering how undergrad classmates who now attend grad school/TA at that place often complain how “damned conservative” and “politically apathetic” most of university community is….

It is far more hilarious when wingnuts apply the “ultra-radical MarxoLiberalism” to more politically centrist institutions such as Columbia University.

The weirdest thing seems to be the assumption that the better tax policy would encourage each individual to work as much as possible.  Also, it might be fairer if he noted that the biggest difference in the scenario is the estate tax, which for most people, does not factor into their calculations.

Eric, once again, you are saying what I am thinking.

@pepito:

What about the opportunity cost of hiring the other speaker?  Wouldn’t they be giving up some other activity (presumably some other work) for the gig?  Or is it turtles all the way down?

@Jesse Taylor:

Um, it’s not quite so complicated as you seem to think.  It involves

1) Taking a fee and reporting it on his tax return
2) Buying stock with that fee

That’s it.  If that’s “doing everything in your power to pay as many taxes as possible on that money,” I think that says more about the tax system than about Dr. Mankiw.

@Indy,

Why should his incentive to work remain the same if his marginal rate goes up?

It’s that as a result of higher taxes, he’s going to work less, which means he’s going to be less productive, to the detriment of society.

Okay, at the level of 90% taxation I could see that working.

But at the level of 30% vs. 35% vs. 40% taxation, that makes NO FUCKING SENSE. Because when I can make $50 an hour, and I want to make $50,000 a year, and I pay 30% taxes, I have to work about 28 hours a week. But if I pay 40% taxes, then I have to work 32 hours a week. Obviously I am incented to work *longer* hours when I have taxes to pay!

I mean, this isn’t Earth logic he’s spouting here. “I have higher bills to pay (my taxes), so I will work less hard.” Makes no freakin’ sense. Under pure communism when everyone makes exactly the same amount regardless of how hard they work, sure, it makes sense. But the thing about numbers is that they do interesting things at 0 that they *don’t* do anywhere else. If you’re multiplying your hours by a factor that represents how much extra money you’ll get on top of your base salary if you work harder, it stands to reason that you will work hard for a factor of .1 because that’s still profit. But you obviously won’t work harder for a factor of 0 because at that point no multiplication is taking place.

By this logic, no entrepreneur would ever start a business with a tiny profit window, such as selling books, because selling more books doesn’t get you as *much* more money as selling coffee does. Therefore all bookstores should logically transform into coffee shops.

Does this guy actually think that poor people with bills to pay think “Oh, my electric bill is *really high* this month, so I’m just not going to work as hard?” It’s insane. They think taxes belong in a totally different category than any other bill and somehow taxes alone incent you to work *less* hard to make money when it’s harder to make money. Most of us work *harder* to make money when the going gets hard.

I mean, this isn’t Earth logic he’s spouting here. “I have higher bills to pay (my taxes), so I will work less hard.”

That’s not the trade-off though.  The comparison isn’t work vs bills, it’s work vs free time.  Any marginal increase in work has to be weighed against its opportunity cost, the loss of all the other things you’d be able to do with that time.  Let’s say I can work an extra hour for $10, and I decide it’s worth it.  That $10 is taxed at a rate of 15%, which means I’m actually earning $8.50.  That’s still worth it to me.  Maybe that extra hour of my time (time to spend with friends, or on hobbies, or whatever) is worth $8 to me - so if the tax rate goes up to 20%, then it’s a toss-up between them, and if the tax rate ever goes above 20%, then it’s not worth it to me to work that extra hour, because I get more personal benefit from not working.

The lack of Earth logic comes in when you consider that for most people, this kind of incremental approach doesn’t work.  I do not actually have a choice to work an hour more or an hour less; I work 40 hours a week, period.  It’s different for some people, and some of those people are high earners - maybe the doctor decides she’d get more benefit from reducing her office hours, for example, because of the marginal tax rate.  But then again, for some people the process of making money is about making money, and not about leisure time; the acquisition of money grants them more benefit than just the money’s buying power.

Anyway.  My point is that, when people talk about incentive to work, this is the kind of thing they’re talking about, and it really doesn’t apply to the vast majority of people.  The argument makes sense in the abstract, but it doesn’t always hold up well in practice.

Benquo’s arguement makes perfect sense, IF you assume that the earner doesn’t need the money s/he would earn to survive.  Indeed, if I could pull enough money in off of savings account interest to support myself comfortably, then my incentive to work could decrease with a tax increase, because I’m working at least partly for my own amusement.

However, while I was lucky to be born into a family that qualifies as upper-middle-class here in the midwest, I don’t have the luxury of working exclusively for fun money.  I’m working so I can pay my mortgage and buy groceries.  If my taxes go up, I’ll be working the same amount as right now, because working extra hours doesn’t earn me anything anyway.  However, it wouldn’t make sense for me to avoid a raise because it might increase my tax rate, since at the end of the day a raise gives me more disposable income than I already had.  Whether I would rather work part time and have more time for my hobbies is irrelevant, because I can’t afford to work part time.

Percentages are important, but in terms of household budgeting, net income is the number that actually matters.  And since (in general) working harder increases net income, only people who are sufficiently well-off that they can choose to work less simply to demonstrate their dislike for taxes are going to do so.

The argument makes sense in the abstract, but it doesn’t always hold up well in practice.

You will find that this is a recurrent theme in any discussion with Chicago School economists like Mankiw.

Sadly, they are still considered “intellectuals.”

The lack of Earth logic comes in when you consider that for most people, this kind of incremental approach doesn’t work.  I do not actually have a choice to work an hour more or an hour less; I work 40 hours a week, period.  It’s different for some people, and some of those people are high earners - maybe the doctor decides she’d get more benefit from reducing her office hours, for example, because of the marginal tax rate.  But then again, for some people the process of making money is about making money, and not about leisure time; the acquisition of money grants them more benefit than just the money’s buying power.

The reason I find the argument ridiculous at the tax rates we’re discussing is because for a while I *did* have a job like that. While my babies were, well, babies, and I was nursing them too heavily to want to put them in day care, I did a part time IT job from home where I could pick my number of hours, within the parameters of how much work there was to do. I generally worked about 10 hours a week, but if I felt like having more money, I’d work 12 or 15.

The amount I was making was $50/hr. Since I file joint and my husband makes a lot of money (explaining why I could afford to work 10 hours a week), I’m taxed in the highest bracket. With all my other taxes thrown in, and my exemptions, and whatnot, this worked out to losing approximately 30 percent of every $50, or netting $35 an hour.

Now let’s say that Obama jacked the marginal rate on the top bracket high enough that it put my *whole* tax bill at about 40 percent. Then I would net $30/hr. Ten hours at $35/hr got me $350; I’ll have to work 12 hours to get $360 if the taxes went way up.

If my ten hours was nothing but me earning fun money, and I don’t care how rich I get, I may continue to work 10 hours and make $300. If I’m ambitious and want to make as much money as I can, I’ll increase the amount of work I do to make up the shortfall. I cannot even *imagine* a scenario where I would decide to stop working or work *fewer* hours… because if I’m very poor (and therefore the tax increase really really hurts my wallet), I may be making a really tiny amount of money, but I desperately need as much of it as I can to live. (Also, the tax increase probably wouldn’t apply to me.) If I’m rich, then either I am so comfortable I am really not worried about money, so I’ll do as much work as I used to do and get less for it, or I’m ambitious and driven to make money, so either I will do *more* work to make up the shortfall or I will seek out a raise.

If I was very very rich, and the marginal rate caused a *huge* loss, so that I normally made $300/hr and now I only make $100… yeah, then I might give up working in disgust and live off my savings. Odds are, though, that I won’t, because either my lifestyle has grown to accomodate my ridiculous hourly rate and now I *need* that kind of money coming in, or I wasn’t actually working in order to make more money so much as I was working for power, personal fulfillment, status, etc. And in any case, no one is talking about taking 66% away of a rich person’s paycheck! I don’t feel like doing the complex math involved, but when the *marginal rate* goes up from 33% to 39% it’s only an increase of 6% (that’s sales tax. You wanna get that money back, do all your shopping in Delaware) and it’s only on the part of the money that tops out above the top bracket. If your yearly income has to be $100,000 to be in the top bracket, and you make $200,000, and you got that by working approximately 40 hours a week, approximately 50 weeks a year, making $100 an hour… your 6% increase would only be on $50 of it. You lose $3 out of $100/hr more than you were paying already. I’m sorry, but I am rich enough to know that if you have $100, you don’t *care* about $3.

I believe someone on Salon did the math to compare McCain and Obama tax plans for Joe the Plumber and came up with Joe having to pay $217 more a year under Obama. TWO HUNDRED BUCKS. I’m sorry, Joe probably spends that much a year on note pads for his secretaries to write down who called and said their sink is leaking.

It’s just ridiculous. The fact we can even be *having* these arguments is because most of America is innumerate, and can’t do the tax math to save their lives. But if you’re that rich and you don’t have an accountant to tell you “Well, the difference in taxes is actually only $217,” you are a bad businessperson. And if your accountant did tell you that and you’re flipping out anyway… you’re just a bad *person*.

The fact we can even be *having* these arguments is because most of America is innumerate

Well, not quite.  It’s because Americans are trusting of authority, such as the very learned economics professors like Mankiw, so when those authorities say that high taxes decrease work incentives and are therefore bad, we believe them.  Besides, who wouldn’t like lower taxes?  It just sounds objectively good to be for lower taxes.

The very learned Dr. Greg Mankiw is in fact full of shit, and I say that as a layman with absolutely no authority whatsoever except my own native intelligence and observational skill, which I’m sure Dr. Mankiw and his adherents find lacking, and which bothers me not one bit.  I’ve had this same argument numerous times over on Megan McArdle’s “econoblog,” with predictable results, namely that I am not qualified to say that the emperor has no clothes because I don’t have a Ph.D. in economics like Dr. Mankiw, and even if I did I’d still be wrong so nyah.

For the record, Alara, I think you are exactly right.

What the fuck? Is it me, or is he mocking the idea that children might prefer spending more time with their parents to receiving a larger estate share?

Keep in mind, though, this is N Gregory Mankiw we’re talking about.  I’d take the money.

ZING!

@Emaloo,

I somehow suspect that Mankiw “doesn’t need the money s/he would earn to survive.”  I think that’s why he specified this was about his own incentive to work, rather than someone else’s.

@Alara,

I agree that people who really need every last dollar of current income to make ends meet might respond to higher taxes by earning more, but I have serious equity issues with ratcheting up taxes on poor people just because they can’t afford not to work.

Also, I’d give a little more weight to substitution opportunities, at least in the long run.  Just as while in the short run you can’t go without transportation, but if gas prices go up long-term you might move somewhere that doesn’t require a car, you might respond to higher tax rates by adopting non-monetary means of getting what you need.

You can produce on your own a lot of what most people buy, for some finite amount of labor.  For example: There is some tax rate at which I’d decide that instead of working longer & harder to buy prepared food, it would cost less of my time to cook for myself.  (Or even to start a garden!)  That’s just one of about a million examples.

I recall reading somewhere that some big portion of the “leisure” gap between America and Western Europe (esp. France) is made up for by the fact that we buy more labor-saving devices and services, while they are more likely to use vacation time to paint their house or something (rather than working a few days more & hiring a painter).  But I’m not sure how reliable that particular statistic is, so I’d rank it around the level of anecdotal evidence.

Also, I thought that the fantastic success of the EITC showed that people with low incomes (who are most likely to really need the cash) are extremely responsive to marginal rates (i.e. a lower or even negative marginal rate causes the to work more, or at least report more income), which makes the notion that higher taxes cause people to work more a little problematic.

Among the many, many things effortlessly discounted by Mankiwvian/McArdlian analysis:

-Salaried people get no overtime, and thus have no incentive to work harder regardless of how low taxes are (if there is such an incentive to work more, it’s not due to low taxes);

-Hourly people are often expressly prohibited from earning overtime, so simply “working more hours” is not an option (working more jobs is more likely, but not necessarily a desirable development);

-Hourly people’s bosses are usually pretty alert to who’s slacking off (if the boss is doing his job), so people who decide on their own to “work less” due to the theoretical high tax disincentive would tend to join the ranks of the unemployed rather quickly.

@liberalrob,

Do you see the tension between your first two points and the third?  Even though it may not be possible for some people to respond effectively to incentives in the short run (over a period of days or months) it is quite possible for even salaried workers to respond in the long run.  Changes in the marginal rates make angling for a promotion or higher-paying more stressful/time-consuming job more or less appealing than it was before.

Moreover, even if everyone made discrete and not continuous choices, all that’s required for a change in marginal rates to have an immediate effect is that people’s various tipping points are continuously distributed.

I agree that people who really need every last dollar of current income to make ends meet might respond to higher taxes by earning more, but I have serious equity issues with ratcheting up taxes on poor people just because they can’t afford not to work.

Oh, I agree. Which is why I’m surprised (except not really) that the conservative meme isn’t “Making people earn less money by taxing them harder forces them to work harder, so they have less time to spend with their families!” *That’s* actually something that makes sense, and can resonate with the working class guy who’s not following the news about taxes closely enough to realize that actually, he doesn’t make enough money for the problem to apply to him (or imagines that someday, he will make that much money and have that problem, without also imagining that when he makes that much money, he can afford to buy back some leisure time, for instance hiring someone to mow his lawn instead of taking the time to do it himself.)

But “Making people earn less money by taxing them harder makes them cut back on the hours they work!” just makes no friggin’ sense in the real world. At the level of the poor, you gotta have the money to survive; at the level of the middle class, you gotta have the money to maintain your standard of living, because your mortgage won’t go down just because your taxes are higher; and at the level of the working rich, it’s such a dog-eat-dog world with such intense competition for slots at the top that anyone who did slack because he was mad about his taxes would be easily replaced with someone who would gladly take his spot. It doesn’t even make sense to say that people who are salaried or can’t get overtime will feel less incented to work and thus be more sluggish and less motivated about doing their jobs, because if their taxes go up, they will probably want a raise to compensate, and you don’t get a raise by being a slacker.

The whole thing starts to make sense when you have top marginal rates of 90% and so the absolute richest people feel as if everything they put in once they’ve gone over the edge of the top bracket gives them severely diminishing returns. If I was making, say, a million dollars a year, and everything above $900K was taxed at 90%, I wouldn’t be motivated to bust my butt to make an extra $100,000 above my million, because I’d only be taking home $10K of that. But we don’t *have* marginal rates of 90% for anyone, Obama has never proposed raising the rates that high, it would only affect the behavior of millionaires and to be honest, productivity in this country is *not* driven by how hard millionaires work, small business owners would not be profoundly affected because I can tell you as a small business owner myself you can write off EVERYTHING if you’re creative, and at rates like 30% or 40%, you would expect very different behavior from basic human psychology anyway.

I can see, however, why conservatives would not want to take this tactic. Since they believe that all humans, except the white female ones, should simply work, work, work, and do nothing else, making the argument that taxes are bad because they force people to work *harder* would not fit their psychology.

Also, I thought that the fantastic success of the EITC showed that people with low incomes (who are most likely to really need the cash) are extremely responsive to marginal rates (i.e. a lower or even negative marginal rate causes the to work more, or at least report more income), which makes the notion that higher taxes cause people to work more a little problematic.

Yes, at very low (or especially negative) marginal rates you might expect different behavior because humans do different things at the extremes than they do in the middle, generally speaking. If people report more income when they have a negative marginal rate, it could be that they are actually bothering to fill out their tax returns as they’ve finally realized that they can expect a big whopping chunk of money back. (True story: as a young man, my husband and his ex didn’t believe in taxes. Big-time libertarians, whole host of reasons why they thought taxes were in fact illegal. They also made very little money, being really young. So they never bothered to file a return. In 2003, this made the money he was supposed to get back on his return disappear because the IRS just filed a return *for* him, claiming he had been single with no kids, and therefore claimed he had back taxes owed. So I hunted down his receipts, created his *accurate* 1996 and 1997 returns with his children on them, got his ex-wife to sign them so they could file them joint retroactively, and submitted them. IRS sez, “You were due a refund of several thousand dollars, because you qualified for EITC! But you needed to file it within three years, and you didn’t. Bzzt! You’ve just donated all that extra money to the government. Waaat waat.” Moral: When you are poor, it behooves you to file your damn returns. Drinking the libertarian koolaid cost my husband several thousand dollars.) Or it could be that poor people, operating in the marginal economy without (generally) access to banking, prefer to get paid under the table if they think most of their money will go to the IRS, but are happier about reporting their income when they think they’ll get a nice big refund. Maybe it’s that actually *having* more money in your pocket when you’re very very poor improves your ability to make money (for instance, with lower taxes maybe you can afford to buy a junky old car that can take you to a better work opportunity than the 7-11 down the street you were walking to for work.)

None of this really applies to the middle class and the rich. We already have enough money to invest in our opportunity costs, no one wants to pay us under the table because when the sums get large, people want the protection of the law, and we’re generally educated about taxes well enough to know it’s a good idea to file your return.

@Alara Rogers:

I’m not sure how to reconcile the notion that trying to keep up a minimum standard of living makes people work more when marginal rates go up, with the notion that the poor respond very positively to reductions in the marginal rates.

Shouldn’t the income effect (relative to the substitution effect) be strongest with the poor?  Shouldn’t they feel the need to keep up a certain minimum most acutely?

And I’m not so sure the evidence agrees that the middle-class don’t respond to marginal rates the way classical economics would suggest.  Look at this:

http://online.wsj.com/article/SB122548483530388957.html

The writer tries really hard to make it look like this is some purely cultural shift in Japan away from working hard and the notion of career success, but doesn’t quite manage to hide the obvious cause:

“Moreover, getting a promotion no longer means getting such a big pay raise. The wage difference between managerial and rank-and-file positions has shrunk over the past decade as companies cut compensation amid restructuring. In 2005, division managers were paid about 2.2 times the rank-and-file worker, down from about 2.7 times in 1985.”