Important point

To be somewhat nerdy about it, the deadweight loss of a tax rises with the square of the tax rate.  Thus, increasing or decreasing a tax rate by 1 percentage point has a small effect on economic well-being if the initial tax rate is low, but it has large effect if the initial tax rate is high.

8 thoughts on “Important point”

  1. My favourite point in Mankiw’s post is actually ‘Some of those activities may look like leisure, but others may be better described as “fun work” rather than “income-producing work.” Blogging, for instance, or writing op-eds that particularly inflame the left-wing blogosphere.’

  2. Mankiw’s analysis is a bit strange – if you only analyse one side of the equation obviously you will get net downside. I mean leaving £8,000 to the grandchildren for £1,000 earned is all well and good, but God knows why he thinks he’ll get an 8% return in the absence of a legal system, and without the protection of national defence.

  3. Matthew – I don’t see any sign that Mankiw believes such a thing. All the column was about, and the post was about, was the effect of *higher* taxes on his work effort, he didn’t say anything about what the world would be like if there were no taxes. The whole heading was:
    “I Can Afford Higher Taxes. But They’ll Make Me Work Less.” Note the word “Higher”.

  4. Tracy W,

    Hush your mouth! Don’t you know it is impossible to argue for lower taxes without that automatically meaning you want no taxes at all?

    It is a Guardian/Richie/BBC approved fact that any tax cut at all will inevitably result in civilisation collapsing into post-apocalyptic ruin.

  5. Guy/Girl.

    To quote:

    “Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered? ”

    Of course the argument is bollocks in many ways, but the fact that the return is not independent of having taxes is a minor one worth pointing out. Mankiw leads a very privileged existence in world terms and I think that’s partly because of the taxes he pays.

    Finally a little plea that people read the pieces linked to before commenting.

  6. Matthew, that quote doesn’t even mention national defence, or the legal system. The words “national defence” and “legal system” do not even appear in the quote.

    Now perhaps you think that that quote necessarily implies the argument that you made, but perhaps Mankiw thinks differently. It’s one thing to say “this argument logically implies…., and therefore it’s wrong/impractical/etc”, it’s another thing to jump to the assertion that someone who made that argument therefore agrees with your implication, and start making rhetorical assertions that they do believe it. Perhaps the other person is not as smart as you, and hasn’t seen the full implications. Perhaps the other person is smarter than you, and has seen that the apparent logical implication doesn’t actually follow. Perhaps Mankiw badly chose a wrong way of expressing his idea. Saying “God only knows why he thinks…” without knowing if Mankiw actually does think that, is silly.

    A little plea that you read the pieces linked to, before commenting.

  7. Tracey you said that “he didn’t say anything about what the world would be like if there were no taxes” which is not true. He shows how £1,000 earned writing an article would yield £10,000 for his children. Later he recaps: “Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000”

    I suggest the ‘would’ means ‘would’ and that’s wrong as it ignores the positive side of government spending, such as the armed forces.

    You (I think, you have to make assumptions in this as I can’t continually ask you) are saying that the ‘would’ doesn’t mean ‘would’ and by assuming that I am mind-reading.

    I think that’s silly. If you are comparing the return on $1,000 in two scenarios – without any taxes (I think that he does is clear enough) and with taxes, surely you should add in other factors? It’d be like saying if buy a ferrari it costs me $100,000, but if I steal it I get it for free, and suggesting therefore that stealing it is the obvious choice.

  8. Matthew – good point, he did say that the money his children received if there were no taxes on it. I missed that. I withdraw my statement that “he didn’t say anything about what the world would be like if there were no taxes”, thanks for pointing out my mistake.

    But that’s not the same as saying that Mankiw “thinks he’ll get an 8% return in the absence of a legal system, and without the protection of national defence”. There are other ways of charging taxes than charging them on on labour and capital – eg flat taxes on land. And the advantage of a tax on land is that the supply is fixed, so it doesn’t have the distorting effects of the taxes Mankiw describes. (Whether it could raise the money the current US government does is another matter, but the current US government, federal and state, pays for a lot more things beyond the legal system and national defence).

    It’s one thing to argue that Mankiw’s argument is wrong because of the logical implications of a world without taxes, and indeed to say that someone’s stupid for not seeing that logical implication, it’s another thing to jump to the conclusion that he already believes in that logical implication. You’re making one word “would” bear too large a burden.

    f you are comparing the return on $1,000 in two scenarios – without any taxes (I think that he does is clear enough) and with taxes, surely you should add in other factors?

    Not necessarily. Sometimes you can wind up buried in the other factors, and lose the point you are trying to make. In this case, I think the point Mankiw was focusing on was how taxes kept on adding on themselves throughout the investment process, so the end amount of money his kids got, post-tax, was a lot lower than it otherwise would have been, and for that situation, comparing with and without taxes is logical.

    Ideally he would go in to add in all the other factors, but newspaper columns have tight word limits.

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