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Updating Mankiw

Posted By Barry Ritholtz On October 23, 2010 @ 2:30 pm In Really, really bad calls,Taxes and Policy,Weblogs | Comments Disabled

Last week, in response to a NYT [1] column by Greg Mankiw, I posed several questions [2] about what I took to be holes in the column’s premise. Namely, that small changes in tax rates had outsized impact on human behavior. The questions also challenged the Harvard Professor (and former CEA chair)’s assertion that this marginal increase in tax rates would significantly reduce his incentive to work.

Rather than merely call the thesis nonsense, I instead posed a series of questions, the answers to which demonstrated how disengenuous the professor’s argument was.

This week, he responded [3]. In an addendum. To “some blogger [4].”

If you thought the original column was disingenuous, check out the response:

Addendum: Some blogger named Barry Ritholtz poses a bunch of questions [5] for me, which I won’t bother taking the time to answer. Unless, of course, he offers to incentivize me sufficiently. For free, however, I will answer one of them: “You teach at Harvard and live in ‘Taxachusetts.’ If state taxes are so important, have you considered teaching at Yale, and living in much lower state tax land of Connecticut?”

First of all, the top state income tax rate is higher in Connecticut than it is in Massachusetts.

Second, Yale? Are you serious? Yale?

The point, which Mankiw so deftly ignored, was that in the real world, people do not respond aggressively to minor incentives (such as marginal changes in income tax).

As to the corporate rate of taxation at 35% — this week, we learned that Google’s profit machine only pays 2.4% tax [6].
But as to his Connecticut comment, it was not only disingenuous — it was (mostly) wrong.

Before 1991, Connecticut had no income tax; Up until 2010, their rates were considerably lower than Massachusetts. The change in CT for 2010 is on income > $500,000 rate of 6.5%. So my point being that if marginal rate changes really impacted people’s behavior dramatically, then those incentives would have had him living in CT for most of the past few decades.

As to the actual tax rates, here is what I dug up from the intertubes:

Massachusetts Tax Rates
Income – 5.3%
Capital Gains 12%

Dividends 5.3%

Optional Tax Rate 5.85%

Connecticut
Income – 3 or 4 or 5%
Any income > $500,000 rate of 6.5%.
Capital Gains – 7%
Dividends and interest income are taxed between 1-14% (from 54k to 100k)

So prior to the recent change, the answer was that Massachusetts was appreciably higher than CT.

After the 2010 changes, the answer depends upon your gross income, as well as your cap gains. CT still has a lower tax rate for earner under $500k, and a lower effective tax rate for earners between $500k and XXX (try slapping that into a spreadsheet and see what the numbers are).

Even since the CT 2010 tax increase, the state you pay more in will be a function of exactly how much your income is and from what sources.

But the point is for the past 30 years, taxes were lower in Connecticut than Massachusetts, and yet he worked in Mass.

But forget Yale — if we are to really believe the thesis about marginal incentives, then what about Dartmouth? Consider New Hampshire’s tax rate is ZERO. The state has no general income, sales or use taxes. The only tax that would apply is a 5% tax on dividends and interest income of more than $2,400 ($4,800 for joint filers).

Thus, why is the good professor so motivated by a 3% change in marginal rates, but not a 5.3% reduction (plus elimination of a 12% cap gains) ?

There is yet another alternative explanation: Perhaps the chatter about his unwillingness to work due to the impact of a 3% increase in taxes is purely unmitigated academic balderdash.

Even at Hahvahd, they must know how to spell the word “bullshite” . . .


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/10/revisiting-mankiw/

URLs in this post:

[1] NYT: http://www.nytimes.com/2010/10/10/business/economy/10view.html

[2] questions: http://www.ritholtz.com/blog/2010/10/10-questions-for-greg-mankiw/

[3] responded: http://gregmankiw.blogspot.com/2010/10/mckinsleys-mistakes.html

[4] some blogger: http://www.env-econ.net/2010/10/calling-ritholtz-some-blogger-is-like-calling-mankiw-some-economist.html

[5] poses a bunch of questions: http://economix.blogs.nytimes.com/2010/10/18/ritholtzs-questions-for-mankiw/

[6] pays 2.4% tax: http://www.ritholtz.com/blogGoogle 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes http://noir.bloomberg.com/apps/news?pid=20601010&sid=aujAc626t9WY

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