Sunday, October 10, 2010

Greg Mankiw forgets about the income effect

Professor Mankiw says he can afford higher taxes.  For that I give him credit.  But he also says that higher income taxes might keep him from writing his New York Times column.   He then implies that higher taxes will generally keep people from working.

This is the substitution effect--because leisure becomes relatively cheaper, people consume more of it.  But higher taxes also reduce after-tax income (obviously), so in order to maintain living standards, one might decide to work more in the face of higher taxes.  This is called the income effect.  I can speak for my household--our after-tax income is more than sufficient for our "needs," but if we were taxed more, we might have to work more to satisfy these "needs."

It is an empirical question as to whether within certain ranges of tax rates, raising taxes increases or reduces effort.  Theory gives us an ambiguous answer.  (h/t Mark Thoma).

12 comments:

Richard H. Serlin said...

I constantly have to remind people of this, so thanks for helping.

But it's not just an empirical question. There's also an empirical answer. This has been studied greatly.

It turns out that people upper middle class and higher -- like Mankiw -- tend to work harder when you increase their taxes.

Over the very long run there are many things at work, but note that people 100 years ago had a small fraction of the take home pay of people today. By Mankiw's intentional misleading that should mean that they worked a fraction as much, but in fact they worked MORE.

Here is the summation of the empirical literature from a top expert in this area, MIT economist Jonathan Gruber, “Changes in tax rates appear to have relatively modest effects on total gross income; the total amount of income actually generated through work or savings does not respond in a sizable way to taxation”, (“Public Finance and Public Policy”, 2nd edition, 2007, page 734)

Seascapecapital said...

Hey Dude,

Really your thought will be a great mainstream for those who are looking for Real Estate. As it sounds very good though i would like to light it at the wall of my facebook.

Real Estate Note

Real Estate Company said...
This comment has been removed by the author.
Real Estate Company said...

Great information but some kinds of people like lowest class people are unable to pay taxes because their income is very low.
Thanks,
Corwin
http://www.morcon.com

Jessicca said...

I am agree with Morcon Updates like
some kinds of people like lowest class people are unable to pay taxes because their income is very low.
Best Regards
Real Estate Gran Canaria

led said...

Christian Louboutin Tall Boots
Christian Louboutin Wedges
Christian Louboutin Pumps
Christian Louboutin Sandals
Jimmy Choo Shoes
Moncler Kid's Jackets
Moncler clothing wholesale
Wholesale Moncler Jackets
discount Moncler Jackets
http://www.shopmoncler.hk/moncler-jackets
http://www.utsource.net/BUK444-500B.html
http://www.utsource.net/MG50Q6ES41.html
http://www.utsource.net/UM150CDY-10.html
http://www.utsource.net/MP7002.html
http://www.utsource.net/TMS320F2812PGFA.html
http://www.utsource.net/CEM3374.html
http://www.utsource.net/2sj74.html

Unknown said...

moncler.com
Moncler italian
Moncler france

herve leger dress.
bandage dress
herve leger

moncler jacket
moncler jackets
moncler online shop

Ojanx said...

peluang bisnis
bisnis pulsa
pasang iklan baris
iklan gratis

Knox Karter said...

Super-Duper site! I am loving it!! Will come back again - taking you feeds also, Thanks.

Theaters Logo

logo bench said...

Simply perfect blog post - I save it on delicious - need more posts like this!

Create a Business Logo

Jessica Robert said...

agree with this particular analysis more than just about any We have viewed until eventually these days online. I prefer it isn't created within snobby vocabulary. Many thanks a great deal.

Rent Apartment Barcelona

Jessicca said...

City legends run ramped as well as can be very expensive when you starting the acquire or maybe sale conclusion about a thing that anyone heard of which happens to be fake. This article will try and dispel many of the legends on the market. Although this can be just the end on the iceberg, a very important thing which can be done is chat openly using an agent you trust.

Hotel Colmar