Thursday, October 14, 2010

Mankiw On Tax Rates

Greg Mankiw, author of the most common introductory texts in economics, lays it on the line with a clever little treatment of tax incentives in the NYTimes.
If there were no taxes of any kind, $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000.

Now let’s put taxes into the calculus... 39.6 percent in federal income taxes on that extra income... 1.2 percentage points... Medicare tax, which the recent health care bill is raising to 3.8 percent... 5.3 percent in state income taxes... that $1,000 of pretax income becomes only $523 of saving, and no longer earns 8 percent... 35 percent corporate tax on its earnings... the $523 in saving grows to $1,700 after 30 years... estate tax...

My kids will get, at most, $1,000 of it.
I wonder how many Econ professors will assign this article along with Mankiws textbook this semester? Hat tip to AidWatch.

1 comment:

Turtle said...

It sounds terrible ... until you realize what's missing. Tax or no tax -- that's a comparison that is both trivial and misleading. Taxes pay for government services, and if there were no taxes, you'd either be paying for those services some other way, or suffering without them.

For a fair view of tax incentive, let the comparison scenario be if the only tax were a poll tax (same tax of, say, $8,000 on every living person). Then the argument about being able to save all of an additional $1000 you earn would be valid, but that's something that only a few high-income earners could enjoy, because most people would use every bit of their income for their poll taxes and their personal expenses.

The other failure of the argument is that if it's really that bad, who would bother working to earn more money? The clear evidence is that the tax structure we have still leaves plenty of incentive for people to work hard, invent things, and produce.