Quantitative Easin'

A Rolling Stone gathers no taxes

For skeptics about the incentive effects of taxation:

The Stones are famously tax-averse. I broach the subject with Keith [Richards] in Camp X-Ray, as he calls his backstage lair. There is incense in the air and Ronnie Wood drifts in and out--it is, in other words, a perfect venue for such a discussion. "The whole business thing is predicated a lot on the tax laws," says Keith, Marlboro in one hand, vodka and juice in the other. "It's why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don't want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out." No wonder Keith chooses to live not in London, or even New York City, but in Weston, Conn.

Source. (HT: Matthew Kahn)

The Colbert Effect

John Cochrane on Tim Geithner

The University of Chicago economist takes on the Treasury Secretary. (nonsubscription link to pdf)

Pricing in Venezuela

From my inbox:

Dear Professor,

I´m from Venezuela. And this picture shows the kind of things you find when you go to a Mercado Bicentenario in Venezuela (which is the new name of a chain of private markets -Cada and Exito- recently expropiated and now runned by the Government).

This one is from Mercado Bicentenario, in Centro Comercial Ciudad Tamanaco (CCCT), a mall, in Caracas, Venezuela.

It says:

Description of the product: Diana Oil.

Fair Price: 4,73 Bfs.

Capitalist Price: 7 Bfs.

% of savings: 32%.

My best regards, and congratulations for your blog, books and everything!

Christy's First Column

Christy Romer has joined the line-up of columnists for the Sunday NY Times Business section (along with Shiller, Thaler, Frank, Cowen, and me).  You can read her first column here.  It presents the case against fiscal austerity in the present economic situation.

Goolsbee, Deconstructed

Where's Peter going next?

Click on graphic to enlarge.

I find Stephen Colbert funny, even when it's at my expense

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Tax Shelter Skelter
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

Kinsley's Mistakes

Michael Kinsley, one of my favorite liberal journalists, says I got my math wrong in my latest NY Times column.  Let me take exception to four points he makes:

1.  Mike says, "Mankiw assumes that his investment earns 8 percent every year and is subject to the corporate income tax at 35 percent and then to the individual income tax at its full fury of 40 percent on whatever’s left."

No, I did not assume that at all.  If I had assumed that, then the after-tax return would be

8 x (1-.35) x (1-.4) = 3.19 percent.

In the article, I used “about 4 percent” as the after-tax return, recognizing that dividends and capital gains are taxed at a lower rate.

2. Mike says, "The top marginal tax rate on dividends and capital gains — the two main ways investors recoup their investments — is 15 percent."

No, it is not, at least under the current administration's policies.  President Obama has proposed raising the tax rate on dividends and capital gains to 20 percent. In addition, the healthcare bill applies the new 3.8 percent Medicare tax to investment income. Moreover, the state of Massachusetts (and many others) taxes that income as well. So my marginal tax rate on dividends and capital gains is really about 27 percent.

That would yield an after-tax return of

8 x (1-.35) x (1-.27) = 3.8 percent.

I rounded up to 4 percent, as a rough attempt to take into account the benefits of deferral.

3.  Mike says, "Mankiw’s assumption of an 8 percent return for 30 straight years seems optimistic."

No, I don't think so.  Recall that this is a rate of return before all taxes, including corporate income taxes.  Also, it is worth thinking for a moment about whether this return is best viewed as real or nominal.  (I skirted this issue in my column, for reasons of space.)  The tax code taxes nominal returns--that is, capital gains are not indexed for inflation.  As a result, for purposes of tax calculations such as these, the right return to use is arguably a nominal return.  A long-term before-all-tax nominal return of 8 percent seems, if anything, too low.

4.  Mike says, "If Mankiw’s marginal tax rate has actually been 80 percent for all these years, it doesn’t seem to have affected his incentives very much, and 90 percent won’t, either."

Mike might recall that he has, as an editor, several times tried to recruit me to write something for him.  I turned him down every time.  If he had offered me a reasonable fee, and somehow could have promised that this income and all the investment returns it subsequently generated would be free of all taxes, I might well have accepted the jobs.

---------

Addendum: Some blogger named Barry Ritholtz poses a bunch of questions for me, which I won't bother taking the time to answer.  Unless, of course, he offers to incentivize me sufficiently.  For free, however, I will answer one of them: "You teach at Harvard and live in 'Taxachusetts.' If state taxes are so important, have you considered teaching at Yale, and living in much lower state tax land of Connecticut?"

First of all, the top state income tax rate is higher in Connecticut than it is in Massachusetts.

Second, Yale?  Are you serious?  Yale?

Hear Me Squawk

Why do economists disagree?

Chapter 2 of my favorite textbook addresses this question.  So does today's Times.

The Myth of Shovel Ready

Me, January 2009:

People don’t usually spend their money buying things they don’t want or need, so for private transactions, this kind of inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being.

The way to avoid this problem is a rigorous cost-benefit analysis of each government project. Such analysis is hard to do quickly, however, especially when vast sums are at stake. But if it is not done quickly, the economic downturn may be over before the stimulus arrives.

President Obama, Now:

In the magazine article, Mr. Obama reflects on his presidency, admitting that he let himself look too much like “the same old tax-and-spend Democrat,” realized too late that “there’s no such thing as shovel-ready projects.”

Barney Frank, Then and Now

A news story from 2003:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry....

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

A news story from yesterday:

In a sharp-edged debut debate, US Representative Barney Frank, a Democrat, and Sean Bielat, his Republican challenger, squared off yesterday over national security, illegal immigration, and the roots of the mortgage crisis....

Bielat, a former Marine officer from Brookline, said Frank had contributed to the downfall and subsequent recession by supporting lenient lending standards for prospective home buyers.

“He has long been an advocate for extending homeownership, even to those who couldn’t afford it, regardless of the cost to the American people,’’ said Bielat, 35.

Frank, a leading liberal who has represented the state’s Fourth Congressional District for nearly 30 years and became chairman of the House Financial Services Committee in 2007, said he and other Democrats fought to curb predatory lending practices before the recession but were thwarted by Republicans. He said he had supported efforts to help low-income families rent homes, rather than buy them.

“Low-income home ownership has been a mistake, and I have been a consistent critic of it,’’ said Frank, 70. Republicans, he said, were principally responsible for failing to reform Fannie Mae and Freddie Mac, the mortgage giants the government seized in September 2008.

Response to Queries

My recent Times column generated more email and blogosphere commentary than usual.  While it is impossible for me to answer all the questions raised, I thought it might be useful to address three of the more common ones.

If no one is proposing eliminating taxes, why compare the Obama policy to a world without taxes?  Economists understand that, absent externalities, the undistorted situation reflects an optimal allocation of resources.  It is crucial to know how far we are from that optimum.  To be somewhat nerdy about it, the deadweight loss of a tax rises with the square of the tax rate.  Thus, increasing or decreasing a tax rate by 1 percentage point has a small effect on economic well-being if the initial tax rate is low, but it has large effect if the initial tax rate is high.  For the margin of adjustment I was discussing (work more now, let your kids consume the proceeds in 30 years) the distortion is very high once all taxes are taken into account.  As a result, every change in this tax wedge has a large impact on the size of the economic pie.

Aren't there ways to avoid some of these taxes, such as IRAs and life insurance trusts?   Yes, and I use such tax avoidance mechanisms to the extent they are legal and practical.  But there are limits to how much they can be used.  Thus, while they lower my average tax rate, they do not affect my marginal tax rate.  That is, for any incremental income, I cannot do more, so I am facing the full tax bite.

Aren't you motivated by more than money?  Of course. I have never suggested that money is my, or anyone's, sole motivation in choosing a lifestyle.  In economic models, we often simplify things by assuming that there are only two activities: work and leisure.  Work has a pecuniary benefit, whereas leisure has a non-pecuniary benefit.  Reality is more complicated.  I face a choice among a wide range of activities, each of which offers some combination of pecuniary and non-pecuniary benefits.  Absent taxes, I would choose an optimal mix of these activities.  When the government taxes pecuniary benefits, I spend more time on those activities that yield non-pecuniary benefits.  Some of those activities may look like leisure, but others may be better described as "fun work" rather than "income-producing work."  Blogging, for instance, or writing op-eds that particularly inflame the left-wing blogosphere.

Woodford on Monetary Policy

Mike argues for "catch-up" inflation.

Ec 10 Nobel Trivia

From my inbox:

Professor Mankiw,

I took Ec 10 during my freshman year, 1979-1980. It may not be obvious from his profile, but today’s Nobel Prize winner Chris Pissarides taught my Ec 10 section that year during his one-year visit to Harvard. So tell your current students that the section leader they are struggling to understand through accented English may someday be a Nobel prize winner.

I read your blog and my son’s college class uses your textbook.

Regards,

[name withheld] ‘83

The Nobel Prize

Congratulations to Peter Diamond, Dale Mortensen, and Christopher Pissarides

My Marginal Tax Rate

Click here to read my column in today's New York Times.

Betting on the Nobel

Here.  A few of my Harvard colleagues are supposedly in the running.  Thanks to Tyler Cowen for the pointer.

Also, by the way, here is a shot from a recent episode of The Simpsons, sent in by a reader:

Update: More prognostication from Northwestern and Chicago and Harvard.

Rogoff on Gold

Ken looks at its soaring price.

Harvard Undergrads, Real and Imagined

I saw The Social Network over the week.  Like every reviewer, I enjoyed it.  In style and tone, it reminded me of Shattered Glass, another excellent docudrama, but one that received much less attention when it came out.

There was one thing that bothered me about the movie, however.  Every Harvard undergrad portrayed in the film was a pompous snob, an annoying social climber, or an antisocial nerd (or some combination of the three).  In short, they were all unlikable. The only really likable student in the movie was a character named Erica Albright, who apparently was attending BU.

After teaching at Harvard for 25 years, I can report that this depiction does not ring true to me.  Most Harvard undergrads are in fact quite likable.  If they were as unpleasant as the film made out, I would have left here long ago. It made me wonder about the veracity of the movie more generally.

Addendum: A former Harvard student informs me that Eduardo Saverin, one of Facebook's cofounders and a major character in the film, was not only a Harvard economics major but also an ec 10 unit test grader.

The Debate over Fiscal Adjustment

1. The IMF and the Economist take on Alesina and Ardagna.
2. My Harvard colleague Alberto Alesina responds.

Jack of All Trades