Pay More Taxes - Session 101

A couple of weeks ago N. Gregory Mankiw wrote an article for the New York Sunday Times Business Section entitled “I Can Afford Higher Taxes. But They’ll Make Me Work Less”. This article which focused on Obama's intention to roll-back the Bush Administration tax decreases on people earning more than $250,000 per year annoyed me and I am curious if it has the same effect on others. More on this below, but I begin with my trip to the Vancouver International Film Festival to see “Inside Job”, a documentary about the 2007 – 10 financial crisis, how it began, evolved and the consequences.

Inside Job describes the meltdown of 2007 –2010 (not yet by any means over) in a raw and unvarnished perspective. Judging from the fact that the same cast of characters remain on the financial stage today in charge of the banks and as advisors to Obama, the problems are likely to be repeated. Most certainly we have failed to take advantage of the crisis to do some housecleaning. A great opportunity has been lost.

“Inside Job” informs us that amongst the perpetrators of this crisis include a small number of very influential economists who have advocated and lobbied for deregulation of the financial system. Several of them are professors at Harvard and other Ivey League universities who also consult to the US administration and various wall street banks, near banks and hedge funds. The Obama administration has retained in critical positions many of the economists and advisors who were responsible for, and in many cases profited from, the policies which led to this disaster.

Take for example, Larry Summers, ex-President of Harvard and also a professor in the School of Government (Harvard) who featured prominently in the film. He was an advisor to Bush and is currently an advisor to Obama. He resigned as president of Harvard after a vote of no-confidence by the faculty:

“that resulted in large part from Summers' conflict with Cornel West, financial conflict of interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a "different availability of aptitude at the high end," and less to patterns of discrimination and socialization. Summers has also been criticized for the economic policies he advocated as Treasury Secretary and in later writings. Since returning to government in the Obama administration, he has come under fire for his numerous financial ties to Wall Street.”

There are many others but I am limited by space and time. These economists, who are to say the least disingenuous, include Mankiw as demonstated by his article “I Can Afford Higher Taxes. But They’ll Make Me Work Less”.  In this article, Mankiw admits he is a professor at Harvard obviously to add some clout to his remarks. I thought I should look him up to see if he had any background on taxes or economics. Unfortunately (for him or me), anyone who writes a book titled “New Keynsian Economics: Imperfect Competition and Sticky Prices” is clearly an economist. Mankiw was also an advisor to Bush (Dubya).

Mankiw’s argument boils down to this. His income is more than $250,000 per year so he will have to pay more taxes if Obama rolls back the Bush tax reductions. He doesn’t have his own jet or Ferrari (allowing him to be piously self-righteous, even self-denying) so he can afford to pay the increased taxes. If requested to write an article for $1,000, he might not do it because the work would not be worth the pay (after tax). He provides some calculations - if there were no taxes, the $1,000 would be worth $10,000 in 30 years; with Obama’s planned roll-back and his kids would get $1,000 (after tax) in 30 years; and lastly in the current regime [assuming lower income taxes, lower medicare taxes, no deduction phaseout (whatever that is) and no estate tax], his kids would get $2,000. Conclusion – he would have twice the incentive to keep working. He says:

“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.”

Judging from this article, Mankiw is one of the entitled libertarians who figures that the emergence of Wall Street as the economic engine of the country and the simultaneous decline of the production of real things which show a much lower rate of return is progress.

No wonder we don’t trust economists. Let’s hypothesize for a moment that the additional taxes raised from people like Mankiw who, by their own admission, can afford to pay them, will be used to provide more education so we will have more doctors or orthodontists who will provide more services.

Furthermore, who are the people going to concerts, reading books and spending money on goods and services – the 1% of people who earn more than $250,000 or the 99% of people who earn less?

Where are these studies showing higher taxes will result in less productivity? Especially if lower taxes result in cuts to education and create more social conflict.

And of course, there is much more to economics than number crunching. Some economists are even paying attention to human behaviour. According to a more recent article in the NYT by David Segal (also an economist) (which refers to Mankiw):

“… a certain amount of psychological guesswork is part of an economist’s job, which accounts for the rise in popularity of behavioral economics, an effort to account for the slippery, indefinite nexus of money and humans. ‘The entire question of how emotion will change people’s behavior is pretty much outside the standard model of economics,’ said Dan Ariely, a professor at Duke University and author of “The Upside of Irrationality.””

It seems Mankiw is prepared to ignore this and cite his own preferences and anecdotal evidence plus ignoring his own bias to advocate that tax reductions should not be rolled back .

In the past few years, millions of people have lost jobs, life savings and their homes while the rich get richer – and this is no myth or whine – Robert Reich, one of the less conservative crowd advising Obama – in his new book “Aftershock: The Next Economy And America's Future” – points out that 1% of people own 23% of the wealth in US. The gap between the median income and the top 1% is growing as well, and the proportions have never been so high since 1928. The wrath of the American public is simmering and may soon boil over.

And there is the deficit or doesn’t anyone care about it anymore? More taxes could even be used to reduce it. Or is the US so far gone that there seems no point even trying to reduce the deficit?

Sure, if you are a narcissist earning $250,000, as Mankiw admits, you may be better off personally if your taxes are not raised. But I am confident that it is a lot worse for the rest of us. And eventually, the mess with catch up with Mankiw’s kids who will have to contend with a society deprived of its middle class and suffering the social strife that goes along with this. Their extra $1,000 is going to look like peanuts.

I am curious why the New York Times gives credibility or coverage to Mankiw. It is rumoured that Mankiw quit his post with the Times because the Times only pays $650 per article and that is just not enough to justify his effort if the tax cuts are not extended. I have to say, I think in the case of Mankiw, the NYT has overpaid.