Michael Kinsley delivered a pretty righteous smackdown of Greg Mankiw on Obama’s tax policies that reminded me of a point that I think too often goes missing in these discussions of incentives: income effects.
Specifically, while it’s true that if you cut my income tax rates I would have more monetary incentive to pitch new freelance pieces, I would also have more money than I currently have. And if I had more money, I’d feel less incentive to pitch new freelance pieces. Indeed, I might decide that I should take advantage of my higher level of take-home pay by doing less work and enjoying more leisure time.
Now of course if we set a new tax bracket with a cutoff right around my current income point, then fiddling with that rate would purely impact by incentives in a forward looking sense. But that’s a pretty special case. For a guy with $500,000 in taxable income, the Bush tax cuts didn’t just mean a reduction in his marginal tax rates they meant a giant increase in his post-tax income. I’m trying to picture a guy with that kind of income, someone who presumably already works long hours, coming home one day and saying to his wife “good news, honey, thanks to Bush’s tax cuts not only are we more financially secure than ever before but I’m going to respond to that change in our status by working even longer hours and spending less time with you and the kids!” That’d be weird, right?
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