Monday, October 18, 2010

Great Questions asked. Will they be answered?

Greg Mankiw, a Harvard Economics professor who is author of the best selling Intro to Eco text books in the country, worked as an economic adviser to w when his tax cuts were passed. Last week, he wrote and op-ed piece in the NY Times where he claimed higher taxes would cause people to work less. You can read his article HERE.

Barry Ritholtz is the author of "Bailout Nation" and the blog "The Big Picture" (by the way, this blog has links to both Mankiw's and Ritholtz's blogs on the right). He is great at picking apart philosophical bullshit, so he posts a list of 10 questions for Dr. Mankiw on his blog. You can read his list HERE.

The debate about taxes rages on, with very little data to support any conclusion. Yet, you can watch morons like Larry Kudlow on CNBC who are sure we need to cut taxes. I find the idea that slightly higher tax rates cause people to work less, or innovate less, as pretty unlikely. Clearly, if tax rates were 80%, it would deter people from working hard to make more. But I have yet to see any evidence that people were less entreprenurial in the 90's when rates where higher, than in the 2000's. In fact, we saw a surge of innovation and the founding of a great many substantial businesses. Why did the founders of Google bother if they had to pay an extra 4% in income tax? And why found their company in California, where taxes are fairly high for the rich? Maybe there are other factors?

The best question Rigtholtz asks is this:

Which decade did you work more — the 1980s, 1990s or 2000s? How much of your work decisions were driven by marginal tax rates?

David Leonhart of the NY Times adds a question of his own, which I often try to ask conservatives ( and never get an answer!).

I’ll add one more: Bill Clinton and Congress raised taxes in 1993. Mr. Bush and Congress cut them in 2001 and 2003. Economic growth was much stronger after the Clinton tax increases than after the Bush tax cuts. Indeed, average annual economic growth from 2001 to 2007, even before the Great Recession, was slower than in any decade since World War II.

Why didn’t the Bush tax cuts do a better job of luring people into the work force, inspiring them to start successful new businesses and lifting economic growth?

What does all this prove about the location of an optimal tax rate? Not a goddamn thing! But it does prove that anyone who is sure that taxes are too high or too low is completely full of shit!

Let's keep an eye out for Dr. Mankiw's answers.

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