Oct 28, 2008

Mankiw bequeaths $7M to middle-aged kids for down payment on first home

I have several economists' blogs on my blogroll. I have a couple of conservative economists' blogs on my blogroll. Greg Mankiw's blog is not one of them, and for a good reason. Although Mankiw is undeniably a first-class economist in terms of his contributions to academic research, his public-policy positions could be charitably described as naive and simplistic, and most of the stuff he writes in his blog is just crap. (His position on Pigouvian fuel taxes may be a notable exception, but I take it more as a confirmation the issue is so non-controversial among economists that even right-wingers agree with the normal people.)

Did I say crap? Mankiw's recent post on his work incentives under McCain's and Obama's tax proposals makes crap look appetizing in comparison. He computes:
even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes. (...) Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.
and concludes:
The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place.

Jonah the Economist does some pretty good debunking of Mankiw's fallacies, showing that Mankiw uses wrong formulas and wrong parameters, as well as a misleading source for his numbers. But the problems with Mankiw's post don't end there; his underlying logic is fatally flawed. Even if the numbers were correct (they are not), his argument would not hold water.

Mankiw's main premise is that any extra dollar he might earn would be set aside, invested, and bequeathed to his children. That is the only way he gets to apply all taxes to it. And here is how he describes the goals he has for those bequests:
To a large extent, the beneficiaries of that extra effort are my kids. My lifestyle is, as a first approximation, invariant to my income. But if I make an extra few dollars today, I will leave more to my kids when I move on. I won't leave them enough so they can lead lives of leisure, but perhaps I will leave them enough so they won't have to struggle too much to afford a downpayment on their houses or to send their own kids to college.
However, to apply a 45% estate tax under Obama's plan, he must be assuming that the amount of his bequest will exceed $7 million (in today's dollars). His stated modest goals are totally inconsistent with bequeathing that amount. Moreover, as an economist, Mankiw ought to realize that inheriting millions would greatly reduce his children's incentives to work.

Mankiw's narrative is not convincing to any reader seeking more than to validate his own prejudice that Obama will raise taxes and destroy the economy. It is unlikely that, as a star professor who obviously loves what he does, he works primarily for money. Even if he does, he states explicitly that he doesn't want any more money for himself, but only for his children. I like how he describes the purpose of the bequests, but it doesn't add up chronologically. I don't know how old Mankiw's children are, but he is 50, and his calculations assume that he will live to 85. By then, I would think his children would be at least in their 40s. If one of the most successful economists in America believes that his children will need help with down payment on their first homes when they are almost his present age, he is either extremely pessimistic or full of shit.

The very end of Mankiw's post is perhaps its best part:
And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.
Whether he arrived at this conclusion by flawed logic or not, the outcome seems the best for all parties involved (especially if "poorer" means having only $7,000,000.00 instead of $7,000,001.85). He is actually implying that he and his kids will be better off under Obama's plan (and we will too, as Jonah the Economist concludes). Could anybody refute Mankiw's main point more effectively than Mankiw himself?

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