taxes on the wealthy

Harvard economist Greg Mankiw, in an op-ed column, cautions that a tax on income of the wealthy will reduce their incentive to work. But he omits something very important.

An important issue dividing the political parties is whether to raise taxes on those earning more than $250,000 a year. ….

So I thought it might be useful to do a case study on one of these high-income taxpayers. Fortunately, I have one handy: me. ….

I acknowledge that my motives in taking on extra work are partly mercenary. I don’t want to move to a bigger house or buy that Ferrari, but I hope to put some money aside for my three children. ….

Now you might not care if I supply less of my services to the marketplace — although, because you are eading this article, you are one of my customers.

N. Gregory Mankiw, “Economic View: I Can Afford Higher Taxes. But They’ll Make Me Work Less”, New York Times, 10 October 2010.

Actually, the issue is not whether to increase taxes on the wealthy – the tax cuts of GW Bush, after all, were temporary and are due to expire very soon. The issue, rather, is whether to cut once again marginal tax rates on incomes of the wealthy. What Professor Mankiw fails to mention – although it is implicit in his column – is that the wealthy tend to be satiated with goods and services, so are likely to save nearly all of their tax cuts. If economic stimulus is the objective, isn’t it better to give tax cuts to those who are not so wealthy, and are more likely to spend any additional income?

One more point: Does the New York Times pay Professor Mankiw for the op-ed columns that he writes? If the pay is zero, or very low, how would tax laws affect his supply of this service to readers?

Update: Greg Mankiw has responded to critics. But he doesn’t address either of my two points.

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2 Responses to “taxes on the wealthy”

  1. D. Watson says:

    Let’s pretend spending is good and saving is bad. There’s this funny thing that you can’t invest what you don’t save. Investment increases the marginal product of labor, which increases some combination of employment and wages. You don’t have to invest what you save, but to simply wave your hand and dismiss savings is to miss a lot of vital economic stimulus activity. Saving does not mean hoarding.

  2. Administrator says:

    D. Watson: Your point would make perfect sense if savers were also investors. Unfortunately, they seldom are, so there can be a lack of investment despite (or because of) low interest rates and a glut of savings. This happens to be true in much of the world at this very moment.