Greg Mankiw’s Work Incentives

Greg Mankiw’s new post on his personal work incentives is required reading for anyone who wants to discuss taxes in this election cycle.

The idea is simple: our tax system uses marginal rates, meaning one rate applies to the first dollar earned and different rates kick in at different thresholds. (That is, unless you’re so economically productive or generous as to get stuck in the Alternative Minimum Tax system and get taxed at high flat rates.) The higher rate is called a marginal rate. This is the rate which applies to the last dollar a worker earns in a year. This rate is the rate which determines how much it’s worth to you to make the effort to earn that last dollar. If you’re acting rationally, it’s the rate which determines whether you take a second job, have a one- or two-income family, or start that business on the side you’ve been talking about.

Mankiw takes it one step further and asks how much he could leave for his kids out of that last dollar under each presidential candidate’s plan. You could do the same thing for any long period of time, of course, like saving for retirement or for your kid’s college education.

Do yourself a favor and read the post.

Leave a Reply