Saturday, November 08, 2008

Higher taxes, please!

In his blog, conservative Harvard economics professor (and Principles of Economics textbook author) N. Greg Mankiw writes that Obama's tax plan is bad because it will cause him to work less*. Mankiw writes:

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. 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.

I, too, have had the experience of anger and frustration when I receive a paycheck that is 2/3 what it is supposed to be. If we step back and look at the bigger picture, however, we may see that higher taxes may be what we need to revive leisure. In current American society, people work far too much: none of my college friends have 9-to-5 jobs and I don't even think twice about the 80-hour workweeks ahead in my academic career because my other options look about the same, timewise. I argue that we should have higher taxes because they create incentives for people to work less. Higher taxes are good because 1) working too much is an externality and 2) it can be internalized with income taxes.

First I would like to establish that overtime work in a society where there are always positive returns to work is an externality**. Besides the obvious immediate effects that one person's working too much has on friends and family, who must absorb the burden, the fact that there are people who work 100-hour weeks has a negative impact on coworkers and society as a whole. As people began working 60, then 80, then 100-hour weeks, society came to grow accustomed to longer workweeks. Because people benefited (accrued more wealth, became more distinguished in their field) from working more, working unnatural numbers of hours came to be seen as something good to do. As a result, in the last half-century American culture evolved from one where the upper class prided themselves on not working to one where "conspicuous work" replaced conspicuous consumption as an indicator of wealth and status.

One negative result of having a culture of overwork where returns to work are not capped is that it creates a winner-take-all society: that is, it is much better at the top rather than near the top. Because people have come to find it acceptible to work all the time, and because working more gets more returns, people have work more even when they are better off than most other people already. The people at the top already have what they need to "climb higher" (a base amount of capital, a good network of contacts, an established reputation, etc.), working harder will take them further than working harder would take someone not at the top. This brings society to an equilibrium where there is a concentration of wealth and talent at the very top rather than having wealth/talent distributed among a larger percentage of people, institutions, etc. This is as true for talent as it is for wealth: for instance, most of the top American computer science research comes from a handful of institutions. The implications here are, then, that if someone wants to "go places" as a computer science researcher, they must join in the culture of conspicuous work and devote 80 hours of their week to their work. Thus low taxes have helped create a society that has a concentration of many of the desirable things in life at the top.

Not only does this culture of work make it much better to be at the top, but it makes it much harder to stay at the top. Since it is acceptible and even considered admirable to work as much as possible, and since it is so much better to be at the top, there are many more people working very hard to be at the top than there people at the top. There is much less stability at the top than there has been historically, and since (again) it is much better to be at the top, there are many people working very hard to either get to the top or stay at the top. (There is an interesting article about Silicon Valley millionaires who work 80-100 hours a week in order to maintain their lifestyles.) This perpetuates the culture of overwork and keeps us in the bad equilibrium.

The second part of my argument is that since monetary incentives helped to create this culture of overwork, we could internalize this externality with income taxes. The culture of 100-hour workweeks initially came about because of investment banking culture, which developed because of monetary incentives. First of all, investment banking is completely driven by monetary incentives because the skills required are equivalent to the skills required for many other things: the one difference is money. Also, in other fields, people did not work as hard before this intense i-banking culture developed. For instance, academics did not seem to work as hard. For instance, James Watson's account of the discovery of the double helix talks about how he would play some sort of racquet sport with Francis Crick in the afternoons. While it could be that the faster pace of life has caused people to work more because it is now possible to make people work all the time, that can't be the whole story. When people going into academia have an alternative choice that involves working much more, it is inevitable they do not feel as bad putting in 10 more hours a week than they would have otherwise.

The externalities caused by working too much outweigh the gains: despite working more than Europeans, Americans are shorter than Europeans and not necessary producing more. A more aggressive tax structure would remove many of the incentives to work more and create a society where people lead more balanced lives. We may be poorer, but we can spend more time playing--and hey, this might make us more productive.

* According to Mankiw, he faces a 62% marginal tax rate with McCain and 93% under Obama.
** An externality is an action that has a negative side effect for which the market does not does not account. To argue that overtime work is an externality, I would need to convince you that it has negative impact on the people who are not doing the work.


Jesse Tov said...

Mankiw is either deceptive or wealthier than he makes himself out to be. Under Obama's plan, unless he's planning on leaving his kids more than $7 million, he won't be hit by the estate tax. Not only that, but he used the payroll tax rate combined with the top marginal income tax rate, but you can't be paying both of those on the same dollar, as the payroll tax caps out long before the marginal income tax rate kicks in. Finally, he's assuming that his investment income gets hit by the marginal corporate tax rate, which is far from what American corporations actually pay.

Given that he's also promoting the Social-Security-is-bankrupt canard up-page, my vote is for deception.

I agree with you that leisure is important and that robust taxes are a good thing, but I question the connection you are trying to make. I currently work rather sane hours, hovering somewhere around 40 most weeks. However, if my effective tax rate increased, I would have to work more to pay my rent.

Are you familiar with the work of Juliet Schor?

jxyz said...

Mankiw makes a ton of money--the guy wrote the intro ec textbook that everyone uses.

Also, if you work "sane" hours, you are in the minority of my peers. I have one college roommate who works 20 hour days; even my roommates who do Teach for America spend weekends grading. In any case, my argument is not about the immediate effect of higher taxes but on the effect of an aggressive progressive income tax on society. As a graduate student, you personally would not have to pay more taxes, but the people working 100-hour weeks to earn $300K rather than $250K will work less, and this will have a positive effect on everyone's expectations of a "sane" workweek.