October 11, 2010
Gregory Mankiw, formerly President Bush’s top economist, raised this question in his NYT column this week. I’ll resist the obvious temptation to pronounce this a win-win and deal with the issue at hand.
Mankiw explains in his piece that the various tax increases (income, capital gains, and estate taxes) would substantially reduce the percentage of any additional income that he could pass onto his children, which he says is his main motivation in earning money. Therefore higher taxes will give him less incentive to write. His point being that many other high-income workers will be in the same boat.
Brad DeLong ably dealt with the basic issue as to whether taxes can be separated from spending over the long-term, as Mankiw’s discussion seems to imply. (They can certainly be separated in periods of high unemployment like the present.) But, there are several other issues to raise.
First, the relevant factor determining work effort is after-tax income, not tax rates. As a result of a number of policy decisions (e.g. protecting highly educated workers from unrestricted international competition, strengthened patent and copyright protection), Mankiw is likely to enjoy a higher after-tax wage even with the repeal of the tax cuts than he would have earned 30 years ago if Bush era tax rates were in place.
If taxes on gambling were applied to gambling on Wall Street, in the form of a modest financial speculation tax, it would drastically reduce the volume of trading. This would substantially reduce the demand for workers with advanced degrees in the financial sector.
Since the financial sector employs a high percentage of the workers with advanced degrees, a financial speculation tax would likely put downward pressure on the wages of people with advanced degrees across the board. An unfortunate aspect of the debate on tax policy is that it leads the public debate to focus on tax rates while ignoring the much more important policy decisions that determine the distribution of pre-tax income.
The second point is that the income/wealth effect of lower taxes may cause Greg and/or his children to work less. This effect is difficult to measure. In any given year, a lower tax rate may cause people like Greg to work more, but this could be different if they accumulate substantial additional wealth as a result of lower tax rates. Greg tells us that his main motivation is to accumulate enough wealth to ensure that his three children can enjoy a comfortable standard of living.
Suppose that he had already accumulated enough wealth for this purpose because the tax rates had been low for a long time. How many columns would Greg be writing then? Alternatively, can we expect as much work out of Greg’s well-educated kids if he provides them with a substantial inheritance as opposed to a situation where they had to work to make ends meet like the rest of us? Or, taken the other way, would Greg be writing as many columns today if his parents had handed him enough money so that he did not have to work to ensure a comfortable standard of living for himself and his children? We don’t know the answer to this one, but Greg certainly gives the issue short shrift in his discussion.
Finally, there is the issue of quality that Brad raises in his blognote, but doesn’t pursue sufficiently. If we pay writers by the word, then we would expect writers to write long books and articles. That’s great if we want long books and articles, but it is not necessarily a way to get good books and articles.
If economists, and others like them, are motivated primarily by money then they will do work that gets them money. This does not necessarily correspond to good economics. Many of the most creative workers received very little if anything in compensation for their work. Think of Vincent van Gogh, Charlie Parker, and Franz Kafka. Suppose we offered these great artists large sums of money for each piece they produced. Would they have produced better work?
I don’t know the answer to that one. I am not arguing that creative workers should live in poverty, only that many of the most creative people in history were motivated first and foremost by a commitment to their work, not by money. It certainly is not obvious that they would have been more creative if they thought there was more money at stake.
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