Wednesday, October 13, 2010

Mankiw elaborates on his marginal tax rate

Yesterday, Greg Mankiw posted a reply to questions/criticism that others gave him in response to a recent New York Times column in which he said this:
Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.

Here's my favorite part of his response to queries:

Aren't you motivated by more than money? Of course. I have never suggested that money is my, or anyone's, sole motivation in choosing a lifestyle. In economic models, we often simplify things by assuming that there are only two activities: work and leisure. Work has a pecuniary benefit, whereas leisure has a non-pecuniary benefit. Reality is more complicated. I face a choice among a wide range of activities, each of which offers some combination of pecuniary and non-pecuniary benefits. Absent taxes, I would choose an optimal mix of these activities. When the government taxes pecuniary benefits, I spend more time on those activities that yield non-pecuniary benefits. 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.

His response is an interesting comment on the economics (and incentives) of taxation. Whether or not you agree with his perspective on taxation, it is a worthwhile read.

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