Mankiw: I Can Afford Higher Taxes. But They’ll Make Me Work Less.

Posted by Nolan Miller on Oct 21, 2010

Filed Under (U.S. Fiscal Policy)

I try to be an intellectually honest economist.  As such, answers to complex policy questions such as whether we should raise taxes on the highest-income Americans should, I believe, depend on a number of empirical factors about the costs of taxation, losses due to decreased work incentives, and the benefits of redistributing wealth from rich to poor.  To my point of view, sometimes the costs and benefits line up in favor of lowering taxes, sometimes they line up in favor of raising taxes.  But, from a policy perspective, this is fundamentally an empirical question.

This is the reason why I find it so frustrating to listen to ideologues on the left and right who seem to know the answer to the question before looking at the facts.  And, this is why I found Greg Mankiw’s recent column in the New York Times to be so refreshing.  In the piece, Mankiw, who is a Harvard economist and chaired the Council of Economic Advisors under George W. Bush, made the following point about President Obama’s proposal to increase marginal tax rates for Americans with the highest income: the rich can afford to pay higher taxes, but raising tax rates will probably make them work less.  Upon reading this I thought to myself “finally, somebody who presents both sides of an argument.”

Rather than rehash Mankiw’s argument, in which he discusses the impact of taxes on his own incentives to engage in discretionary labor such as giving an additional invited lecture, I’ll let Mankiw’s piece speak for itself.  Although some are disputing his exact numbers (see Mankiw’s response here), the basic point is clear.  Rich people probably can afford to pay more in taxes.  But, we should not assume that just because rich people can afford to pay more taxes, that increasing taxes on the rich would be without costs.  In response, we should expect that these people will work less.  We’re probably not talking about Atlas Shrugged here, with the economy grinding to a halt, but we should expect that people will work less.  As with every policy, there are costs and benefits.

So, what is the right way to think about whether we should raise taxes on the rich as a way to close the budget gap?  Well, there are alternatives to raising taxes on the rich: we could reduce spending, raise taxes on everyone, or just continue to fund the government by issuing debt.  Each of these has its costs and benefits.  An intellectually honest approach to the problem involves carefully laying out the costs and benefits of each and deciding, based on overall social goals, which one does the best job.  To argue either that, just because the rich can afford to pay more they should pay more, or that just because higher taxes will reduce work incentives for the rich they should not be raised, is ideology, not economics.