Mankiw’s Right: Money’s Not the Incentive

October 27th, 2008

Subtitle: Pipe Dreams

Greg Mankiw makes more than a quarter-million dollars a year. We know that, because he's expecting to pay the 2-4% payroll tax surcharge under Obama's tax plan, on any extra dollars he earns.

He's also planning to leave his children more $3.5 million dollars (the current inheritance tax exclusion) when he dies. We know that, because he's expecting them to pay the 55% inheritance tax on any extra dollars he adds to his estate.

But he's a simple guy. He doesn't have fancy tastes, and he's not concerned with leaving his children with a huge windfall.

Nice of him to prove the point: when you've got that much money, and are making that much money, more money isn't the key incentive to work more. There's far more utility in spending time with your loved ones.

If Greg's offered a speaking gig with a $10,000 honorarium, it's not the $10,000 that's gonna get him on the plane on that snowy winter night. It's the benefits to his reputation, the opportunity to rub shoulders with his colleagues, the non-financial incentives that accompany that speaking offer.

Larry Ellison isn't looking to build his business bigger because it's gonna have any perceptible impact on his lifestyle or his children's inheritance. They'll be fine.

But what about Joe the plumber? He made $40,000 in 2006. (But he'd like to buy the plumbing business he works for. The owner wants $250,000.) Do you think Joe's $500 tax savings every year under the Obama plan might give him more incentive to work hard and strive for greater things? It doesn't seem like he'll be buying that business any time soon. But maybe one of his kids will…

Give ten, twenty, forty million more Americans a place to stand, and they'll move the world.

  1. Nobody
    October 28th, 2008 at 07:20 | #1

    “Do you think Joe’s $500 tax savings every year under the Obama plan might give him more incentive to work hard and strive for greater things?”
    No, because he doesn’t gain more by working more. He gains it by keeping his income where it is. Marginal rates are the killer here, just giving a larger tax break, or giving tax credits as handouts (over and above what the person paid in tax altogether) motivates nothing, except the person to vote for the candidate making the promise.
    Of course you miss the bigger issue, which is that those working at that higher end tend to try to make more money buy hiring people and expanding businesses, unlike academics.

  2. October 28th, 2008 at 08:25 | #2

    Nobody is correct about marginals, and I realized that even as I wrote the post–should have been clearer. Joe gets that extra $500 *because* his effective marginal tax rate is lower under Obama. 17.9% lower, according the the Tax Policy Center analysis.

  3. October 28th, 2008 at 08:34 | #3

    And more to Nobody: “those working at that higher end tend to try to make more money buy hiring people and expanding businesses, unlike academics.” That is a widespread belief. But evidence suggests that as more of GDP goes to profits and less to wages, productive investment *declines* in favor of financial investments that are loosely or not tied to actual production/productivity.

  4. Nobody
    October 28th, 2008 at 09:22 | #4

    I would be curious about a real analysis of marginal rates that roll back the Bush tax cuts and then add Obama’s. That is the real result of what Obama wants to do, and I haven’t seen those numbers crunched (doesn’t mean it hasn’t been done, just haven’t seen it).
    As for the GDP going to profits, I don’t think that is true at all at the 250K level. Sure, at a corporation making 20M profit a quarter may or may not be reinvesting (it will depend on the business and expected rate of return, desire for diversity, etc.). But I don’t see how you can make the argument that small businesses in general don’t reinvest in the business, and certainly not how 250K is remotely a cutoff for when reinvestment in the business goes down.

  5. Nobody
    October 28th, 2008 at 11:01 | #6

    Thanks for the link. I see that Obama’s marginal rate is higher in all brackets except for the 10-20K bracket. So Joe will have more money to buy that business under Obama, but make less money in doing so.

  6. October 28th, 2008 at 11:52 | #7

    Okay just to make life complicated, another TPC table sez that under McCain’s plan, 19.9% of taxpayers will see a reduction in their EMTR. 50.5% will see a reduction under Obama. In Joe’s tax class (40-50K) it’s 13.8% under McCain, 39.6% under Obama.

  7. October 28th, 2008 at 11:54 | #8
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