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Headline hyperbole

"Kinsley curb-stomps Mankiw," reads the headline on Jon Chait's latest post. Just for the record, this is a curb stomp. I think I saw that movie 10 years ago, and I've never gotten the image out of my head. Kinsley, by contrast, wrote an op-ed column criticizing Greg Mankiw's tax calculations. And it's a good column! But no one's teeth are clicking against asphalt a moment before a boot comes down on their head.

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By Ezra Klein  | October 19, 2010; 12:34 PM ET
 
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Comments

seriously, THANK YOU for making this point. I like Johnathan as a writer, but this was a weird hyperbole. I have also never been able to shake the pit in my stomach whenever "curb-stomp" comes up due to that scene in the movie. So I was expecting a relentless demolition of Mankiw, and instead it was barely even a mild takedown.

Posted by: brandow | October 19, 2010 12:47 PM | Report abuse

When I read that on Chait's blog, I thought it was a deliberate reference to the Daily Show bit above.

Posted by: JEinATL | October 19, 2010 1:12 PM | Report abuse

I think the weakness in Mankiw's argument come from the assumption that he and his kids don't benefit from the government services those taxes pay for.

If you calculate the maginal cost of taxes shouldn't you calculate the marginal benefit?

Posted by: ideallydc | October 19, 2010 1:34 PM | Report abuse

I think the weakness in Mankiw's argument come from the assumption that he and his kids don't benefit from the government services those taxes pay for.

If you calculate the maginal cost of taxes shouldn't you calculate the marginal benefit?

Posted by: ideallydc | October 19, 2010 1:37 PM | Report abuse

And, you know, 100 years ago when peoples' after-tax income per hour was a tiny fraction of what it is today, they had hardly any incentive to work, so they barely worked at all...but wait, they actually worked more hours than today?? I guess they never heard Mankiw's propaganda.

Posted by: RichardHSerlin | October 19, 2010 2:07 PM | Report abuse

This really wasn't much of a curb stomping. The analysis by Kinsley was actually kinda weak. Take this line by Kinsley:

"Mankiw posits that “some editor” gives him $1,000 to write an article. He invests that $1,000 for 30 years at 8 percent and then drops dead."

If Mankiw is offered $1,000 to write an article, he will end up about $523 to invest after income tax, not $1,000 as Kinsley noted.

Then Kinsley said this:

"But in all probability, he does not face a marginal tax rate of anything like 90 percent. Mankiw assumes that his investment earns 8 percent every year and is subject to the corporate income tax at 35 percent and then to the individual income tax at its full fury of 40 percent on whatever’s left. That would be an unusual investment. The top marginal tax rate on dividends and capital gains — the two main ways investors recoup their investments — is 15 percent."

That would be unusual, but if you actually did the math you would notice Mankiw doesn't assume whatever is left is taxed at the "full fury of 40 percent". He said that his investment would pay 5.2% in dividends and capital gains, of which he would net about 4% (~23% tax rate, which presumably includes the Obama hike to 20% and the Medicare investment tax).

"Best of all, if everything goes according to plan and he pops off before cashing in, the entire capital gain disappears for tax purposes."

As long as you don't trade positions at any time over a 30 year period, this is true.

"Mankiw’s assumption of an 8 percent return for 30 straight years seems optimistic."

Not really. First, Mankiw assumes an 8% return in a *tax free world*. In the taxable world, he assumes a 5.2% nominal return to stocks over 30 years. Hardly a heroic assumption.

If we use the average corporate tax rate of ~25% (which I think Mankiw should have done), we're at 6%, and that's before inflation. A 6% return is equivalent to 2% price appreciation, 1.5% dividend yield and 2.5% inflation.

So we'll assume the long run return to stocks is just 6%.

Given that equities have gone nowhere since the summer of 1998, we have a lot of catching up to do. By my calculations, Mankiw should expect an investment in equities to return 8.5% from 2010-2040 if stocks return 6% over 1998-2040.

By the way, Mankiw ignores that his children will also face sales taxes (and quite possibly VAT) on the portion of spending which goes towards retail purchases. There are also non tax considerations such as brokerage fees. Finally, investment risk isn't considered in these calculations.

As it is, there is a high risk Mankiw's $523 investment fails to beat inflation ($523 = $1,097 after 30 years at 2.5%).

Buying a commodity for his kids which appreciates at the rate of inflation (say jewelry) and not reporting the purchases would probably be a better investment than buying stock given his assumptions.

Posted by: justin84 | October 19, 2010 3:19 PM | Report abuse

I had a lot of problems with Mankiw's reasoning, even without getting into the accounting aspects of it. I'm glad to see someone challenging his calculations, though.

Posted by: reach4astar2 | October 19, 2010 3:32 PM | Report abuse

Of course, Chait goes and calls this a curb stomping without bothering to see if Kinsley's points made any sense.

Remember this was a journalist criticizing a Harvard economist's piece on taxation.

The Harvard economist might well be wrong, but Kinsley's piece had plenty of errors and questionable points.

I wonder if Chait would react the same way if a WSJ columnist criticized an op-ed by a climate scientist...

Posted by: justin84 | October 19, 2010 3:58 PM | Report abuse

American History X, the definitive curb-stomp.

Posted by: TheTravisBickle | October 19, 2010 9:21 PM | Report abuse

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