Harvard economics professor and Bush economic advisor Gregory Mankiw in a recent New York Times editorial argues that yes, he could pay more taxes, but at the margin higher tax rates would make him write fewer articles. If the quality of this article was any indication, we can only hope that marginal tax rates revert to the highest possible levels.
The article is full of distortions and outrageous assumptions that a first year accounting student should understand; it is hard to believe that a Harvard professor who as he all wants us to know is highly paid cannot afford to hire someone to fact check his article.
First, he calls the reversion to the tax rates when Bush took office "tax increases advocated by the Obama administration." Perhaps we should have seen this a mile away, but when the Bush administration Mankiew advised sold the tax cuts (advocated in response to a long-vanished surplus) they included an automatic expiration date to keep the price tag down. So to be fair, we should call this reversion of top marginal rates included in the package of tax cuts, the Bush tax hike. Unless of course, President Bush was lying when they he said they were affordable because they were temporary.
Second, he creates the false impression that his current top marginal tax rate is zero. As Donald Cohen, Executive Director on Policy Initiatives points out, Mankiw's top marginal tax rate would increase not by 39.6% but by 2-3.6%, since the comparison has to be with rates today. As an economics professor, Mankiw must know this. The fact that he does yet reports a grossly misleading number is illustrative of those like Mankiw who never let facts get in the way of an opinion, especially when our misunderstanding an issue will personally enrich them (as he admits in the column).
Third, Mankiw states that the 35% corporate income tax rate on the top dollar of net earnings must almost halve his theoretical return to 5.2% from 8% per annum. Wow! This extraordinary legerdemain, along with an assumption that all of this compounding will be taxed at above 20% per year effectively, accounts for the lion's share of the "90%" marginal tax rate he is trying to blame on Obama (67%, to be exact, the difference between an amount compounded at 4% per year for 30 years versus 8%). But companies do not pay anywhere close to 35% taxes on their net earnings anymore than households pay anywhere close to their top marginal tax rates on all of their income. Thanks to generous tax credits and loopholes and aggressive accounting, many companies pay close to nothing in taxes. Those that do pay taxes, pay an increasing proportion of them overseas to governments over which President Obama has no control. At any rate the 35% is only applied to the top marginal dollar, not the entire stream of earnings and there is no evidence it should so dramatically lower returns; the long-term historical return of stocks, with varying rates of corporate taxation over time, as another economic professor, Jeremy Siegel, has carefully calculated is remarkably stable over long time periods - about 7% average after inflation. Assuming 3% inflation, this translates to a 10% nominal return, a far cry from 5.2%. Mankiw also ignores the dynamic impact of higher personal income tax rates on top management; did he consider that a more progressive tax code might also give corporate executives less incentive to write themselves fatter paychecks and more incentive to return marginal dollars to shareholders? The historical record provides no evidence for the neat 1:1 zero-sum trade-off between dollars paid in corporate taxes and dollars returned to shareholders implied by Mankiw.
Fourth, Mankiw claims that after compounding at this lower rate for 30 years, his initial $1,000 of additional income will only compound to $1,700, then will be hit with a massive 42% effective inheritance tax. Has Mankiw not heard of trusts or 529 college savings plans? Is he not aware there is a cadre of underemployed financial advisors who would love to help him set one up? And is he not aware that this tax will not be paid by him - he will be dead after all - but by his heirs, who did nothing to earn it? Since the point of the article is how tax rates impact living workers, it seems unfair to throw in this deferred, theoretical, entirely avoidable tax as an argument to bolster his case. I doubt many people avoid work because their heirs may or may not be taxed on part of the extra money generated decades hence; if so, they are foolish as well as lazy, since no tax rate is 100%.
Mankiw makes a few extraordinary assumptions, compounds them over thirty years, and hopes we don't check those assumptions or his math too closely. He compares the top theoretical amount he could earn if he had to pay no taxes to what he will actually keep in the universe we actually live in. As he quotes Einstein without attribution, the effect of compounding is a "miracle" that allows all sorts of things to grow dramatically, including bad initial assumptions.
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