Tuesday, September 27, 2011

Professor Mankiw's frustrating comment - with no chance to comment!

© 2011 Joshua Stark

Sorry for the non-environmental post, but the Harvard Econ. Professor Greg Mankiw has me a tad frustrated this morning.

I'm no economist, and so, if he cared to, I'm sure Mr. Mankiw could come in and take apart my comments here, (frankly, I'd love that, because I want an accurate representation of economics out in the public, and where I'm mistaken, I want to be corrected).  My real problem is that the Professor posts to a blog, but doesn't allow comments.

First, I would hope Mr. Mankiw would understand that the interactive nature of the internet makes it a world-changing phenomenon, and participate wholeheartedly in this interaction.  Second, I think by opening comments, Mr. Mankiw would watch his own posting a bit more carefully.  Case in point:

I'm poking through the cadre of economic minds on-line (starting at Env-Econ, of course) this morning, and I come across a little post by Prof. Mankiw.  He ends this three-sentence post with:

"If you can remember only one fact, make it this one: The middle class (middle quintile) pays 14.1 percent of its income in federal taxes, while the rich (top tenth of one percent of the population) pay 30.4 percent."

Of course, I'm frustrated by this comment, because it misses a basic economic concept, "diminishing marginal utility".  But, when I scroll to the bottom of the page to respond, I find no way to comment!

So, I'm taking time to point out a couple of mistakes that Mr. Mankiw makes in his inference (as I understand it, he is inferring here that our federal tax system is sufficiently progressive).

First of all, as he points out, the richest 1/10th pay about double in "federal taxes" (we'll get to that definition in a minute) what the middle quintile pays.  My immediate question:  What is 14% to a person making the middle quintile vs. 30% to one of the richest 1/10th?  So, I follow the link he posted, and I find that the middle quintile is defined as people making between ~ $34k and $62k, while the richest 1/10th are defined as making over about $2,468,000.

Then I ask:  What is the marginal utility of this money - the relative impact of 14% on $34k ($4760) vs. 30% on $2,468,000 ($740,400)?  Am I the only one to see that the five grand is way more valuable to the person making $34k than the $750K is to the person making the nearly $2.5 million?  If you don't see that, then realize that I just swallowed the poorer persons yearly after-tax salary in the rounding error for the richer person.

Now, consider that these were just the examples of the poorest in the group.  For the richest of the 1/10th, we are talking billions upon billions of dollars earned per year. 

Upon closer examination, then, it becomes obvious that 14% is a far heavier tax burden on the middle quintile than 30% is on the richest 1/10th.

And there is one other problem.  The "effective federal tax rate" Mr. Mankiw uses doesn't even include federal excise taxes - like the 18.4 cents-per-gallon on gasoline.  For poorer people, these taxes are heavy burdens (one study showed that the folks in the middle quintile pay about a quarter of their income on transportation), but for rich folks, that regressive tax is almost nil.

Professor Mankiw, please consider teaching folks in the ether about real tax burdens and economic concepts (like diminishing marginal utility), and please oh please start participating in the earth-changing world of the interwebs.

I'd be tickled pink if you'd start here.

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