Monday, April 16, 2007

The Matthew Effect

Sociologist Robert K. Merton (father of the economist Robert C. Merton) coined the term Matthew effect, which Wikipedia describes as follows:
eminent scientists will often get more credit than a comparatively unknown researcher even if their work is similar; it also means that credit will usually be given to researchers who are already famous: for example, a prize will almost always be awarded to the most senior researcher involved in a project, even if all the work was done by a graduate student.
The term is based on this biblical quotation:
"For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath." (Matthew XXV:29, KJV).

A piece by Ernest Christian and William Freznel in today's Wall Street Journal (subscription required) offers a good example. The relevant excerpt:

Consider the two versions of the truth that may be drawn from a recent study by Gregory Mankiw, an economist at Harvard.

Reduced to its essence, Mr. Mankiw concluded that a $1 tax cut on dividends would reduce government revenue collections by about 50 cents, after taking into account taxes on $2 of additional economic growth induced by the tax cut. A $1 tax cut from an across-the-board rate reduction would cost the IRS about 77 cents, after taking into account taxes on the 95 cents of additional economic growth induced by the tax cut.

To the champions of bigger government, the important truth of the Mankiw study was that the amount of tax on induced economic growth was insufficient to make up for all of the revenues lost to the Treasury from the original tax cut. Ergo, the government has less money to spend. Ergo, tax cuts are bad.

To those of us who prefer economic growth over government growth, the Mankiw study confirmed a different truth. If Congress is willing to forego 50 cents of revenue, the economy would grow and people would have $2 more income. If given the choice, most people would take the $2.

Now apply the conclusions of the Mankiw study in reverse -- to tax increases. The results illuminate the high costs of providing the government with an additional $1 to spend. A purported $1 tax increase on dividends only nets the Treasury 50 cents -- but costs Americans $2 in lost income, plus 50 cents in tax. When a higher rate is levied on all forms of income, an attempted $1 tax increase yields only 77 cents -- but costs Americans 95 cents in lost income plus 77 cents in tax. If the government were to kick up the tax increases enough to collect a full additional $1, the cost to the public would be between $2.25 and $5, counting both tax paid and income lost. A May 2006 study by Harvard's Martin Feldstein, "The Effect of Taxes on Efficiency and Growth," confirms the disproportionately large economic losses associated with tax increases.

I wrote the study cited with Matthew Weinzierl, a grad student at Harvard. He deserves full credit as a coauthor but is unjustly ignored.

Sorry, Matthew.