Greg Mankiw's tax bill

There's a lot wrong with this Greg Mankiw article on taxes. Most of the really egregious bits are summed up by Kevin Drum, but there are a few he doesn't mention.

It's important, first, to understand that Mankiw is comparing three worlds to each other. In one of them, there are no taxes. That world is there to dramatize the effect of taxation. In the second world, the Bush tax cuts for income above $250,000 expire. And in the third, they don't.

The first world is worthless. A world with no taxes is a world in which we're all British, or Mexican, and thus paying taxes to someone else. It's not a world in which economics professors at prestigious universities are paid thousands of dollars to write confusing op-eds, and that money is then invested in corporations at 8 percent interest over 30 years. So let's just set that world aside.

In the two worlds that actually matter, the tax cuts are neither here nor there. Instead, Mankiw's wealth and his children's inheritance are mainly affected by two other factors: The first is how much money Mankiw makes investing his money, and the second is the size of his estate.

Mankiw is assuming 8 percent annual growth over 30 years. That's pretty good, and it allows him to turn his $1,000 into $10,000, at least before factoring in taxes. Here's the thing, though: That's the sort of return you could've gotten in the 1990s, under Bill Clinton's fiscal management. From 1993 to 2001, the inflation-adjusted, annualized return from the S&P 500 was 10.89 percent. But once the Bush team -- Mankiw included -- came into office, that plummeted. From 2001 to 2009, the return was -2.41 percent. You'd much rather have the Clinton economy than the Bush tax cuts.

Then there's the estate tax. Mankiw is comparing a world with no estate tax to a world with an estate tax. But as of 2009, the first $3.5 million of an estate were exempt from taxation. Before that, it was $2 million. If his estate is below that, the estate tax won't affect him.

And if it's above? Economists measure two separate impacts from taxes. The first, the one most people know about, is that taxes make you work less because they lower the reward. The second, however, is that they make you work more because you need to work more in order to make enough money to live the way you want. When money comes easy, it doesn't encourage you to work.

If Mankiw is passing millions of dollars in tax-free money on to his kids, he's pushing an extreme version of that problem onto them: They'll have very little incentive to work, and much more incentive to paint, or travel Europe. Mankiw's incentive to do more, in this case, is coming at the cost of his children's incentive to do more. From society's perspective, it's not an obviously good deal.

And then there's the factor Mankiw doesn't consider at all: The deficit. Mankiw and his boss passed the tax cuts and didn't pay for them. They passed Medicare Part D and didn't pay for it. So now that money needs to be made up somehow. There are economic costs to raising taxes on the rich. But there are also economic costs to cutting financial aid for the poor, or delaying needed investments in infrastructure. More, I'd bet, than reducing Mankiw's incentive to write opinion articles.