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By the definition Mankiw is offering: 1. a vastly rich country with GDP $1M/person and taxes at 2% of GDP would be a "high tax country"; 2. an impoverished co

by gjm11 17y ago

By the definition Mankiw is offering: 1. a vastly rich country with GDP $1M/person and taxes at 2% of GDP would be a "high tax country"; 2. an impoverished country with GDP $1k/person and takes at 99% of GDP would be a "low tax country". Mankiw's only justification for this is that "high tax rates tend to depress GDP". Perhaps they do, but it seems to me that his proposal waaay overcompensates for any such effect. The question of whether moderately higher tax rates depress GDP at all seems to be controversial among economists, which seems like good evidence that they don't depress GDP much.

esspem 17y ago
What would you say about this correlation between GDP growth and government spending? http://mol-eng.com/growthsm.png http://mol-eng.com/growthsm.png (taken from: http://www.foresight.org/nanodot/?p=3012 http://www.foresight.org/nanodot/?p=3012 )
- encoderer 17y ago
  I'd say that there's a lot more variables that you didn't control. It seems fair to say that a big contributor to our economic success in the 50's and 60's was due to every other first world nation having been reduced to rubble in the 1940s. Manufacturing and innovation in Japan and Europe didn't really roar back until the late 60s and 70s.
  - yummyfajitas 17y ago
    That chart looks at all countries in the OECD (not just the US) and also looks at the 60's and 70's (not the 50's).
- gjm11 17y ago
  Not very much until I know the source of the data and whether I can actually trust it. However, it's certainly not inconceivable that such a correlation might be highly misleading. Here are two simple thought experiments to illustrate this. 1. Suppose that in every country, in every year GDP growth is exactly proportional to government spending the previous year. In other words, spending more produces immediate GDP gains. And suppose that government spending generally changes quite slowly, within certain limits. Then low spending at the start of a decade will correlate with increasing spending over the decade (because of regression to the mean) and therefore with increasing GDP growth over the decade (because of the assumed relationship between spending and GDP growth). So we'll get a graph rather like that one despite the fact that the real relationship between spending and GDP growth is positive. 2. Suppose that GDP growth is entirely independent of government spending, and that it depends on some other characteristics of a country; that high-growth countries tend also to be rich ones (as they would, having grown faster in the past); that all countries would (with equal patterns of taxation and government spending) have roughly equal levels of inequality, so that poorer countries have more really poor people; and that government spending is dominated by attempts to give the poorest people a decent life. Then the poorer countries will spend more, because they have more people who need government assistance to keep out of severe poverty; they will also have less growth (by our assumptions); so we'll see a correlation like the one in the graph, even though there is (by assumption) no causal relationship between government spending and GDP growth. Of course these are both likely to be much simpler than the truth. But then, so is the model you're implicitly relying on if you point to the graph and say "see, government spending inhibits growth" without further analysis. (That model would be something like: GDP growth is purely a function of government spending over the previous decade, and nothing else.)
lionhearted 17y ago
He answered that: > The most common metric for answering this question is taxes as a percentage of GDP. However, high tax rates tend to depress GDP. Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can. For some purposes, a better statistic may be taxes per person He said taxes per person might be a better statistic "for some purposes" - apples and apples comparisons like modern, Western economies might be a good purpose. Apples and oranges comparisons like Japan and Cambodia probably wouldn't be a good purpose.
- gjm11 17y ago
  My point is that he hasn't given any reason to think that tax / person really is a better statistic for any purpose. I know that he says something that looks, in terms of sentence structure, like a reason, but there isn't actually any connecting logic there. Mankiw's a clever chap, so let's give him the benefit of the doubt and try to see if there's any argument he might be hinting at. Perhaps it's something like this. "Higher taxes tend to reduce GDP. The way this works is that people will work less hard, or take less trouble to do more lucrative and presumably more valuable work, if their taxes are higher. The way this works is that people compare the effort they have to exert with the goods and services they can get, which assuming sensible exchange rates is basically the same thing as absolute income; so demotivation is, so to speak, a function of income; so to measure how demotivated our workers are by tax we should look at their taxes in absolute terms." (I don't know whether that's what Mankiw has in mind, but it's the most plausible argument I can come up with that looks at all like what he said.) I'll also mention another argument for measuring tax per person, which I don't think Mankiw hints at at all but which seems at least as persuasive as his argument: the purpose of taxation is to provide the people with benefits, typically somewhat evenly spread across the population or a substantial fraction of it; so the benefit provided per person is roughly a function of tax per person. There seem to me to be several substantial problems with (what I'm guessing to be) Mankiw'sargument, and also with the other argument I mention above, even if we consider only "modern Western economies". Here are some: 1. The prices of goods and services are not at all constant across countries. Unfortunately, there also isn't any simple relationship between these prices and GDP, so it's not clear how to correct for this. (If relevant goods have prices perfectly constant across countries, demotivation is a function of tax per person. If they have prices exactly proportional to GDP, demotivation is a function of tax over GDP. Neither of these simple cases is common.) 2. Some particular goods, including some of great importance for the sort of demotivational effect I think he has in mind, have prices that correlate very strongly with GDP. Notably, houses tend to be more expensive in more affluent countries and cheaper in less affluent countries. 3. It's well established that most people care a lot about status, which goes along with relative income. So one particular and important "good", namely one's level of relative wealth, does in fact vary more or less in proportion to GDP. This observation is relevant to both arguments: the demotivational force of a given level of taxation will (in so far as it depends on status) be determined by tax / GDP rather than tax / population, and the cost of ensuring that no one is too poor in relative terms will also be determined by tax / GDP. 4. The diminishing marginal utility of money means that the richer a nation is, the more effective an average tax dollar is when spent on scalable things (e.g., infrastructure) or benefits for the worse-off, relative to the benefit it would have provided if it hadn't been taken in tax. (And, hence, also relative to the demotivational effect of taxing it.)

by gjm11 17y ago

esspem 17y ago

What would you say about this correlation between GDP growth and government spending? http://mol-eng.com/growthsm.png http://mol-eng.com/growthsm.png (taken from: http://www.foresight.org/nanodot/?p=3012 http://www.foresight.org/nanodot/?p=3012 )

encoderer 17y ago
I'd say that there's a lot more variables that you didn't control. It seems fair to say that a big contributor to our economic success in the 50's and 60's was due to every other first world nation having been reduced to rubble in the 1940s. Manufacturing and innovation in Japan and Europe didn't really roar back until the late 60s and 70s.
- yummyfajitas 17y ago
  That chart looks at all countries in the OECD (not just the US) and also looks at the 60's and 70's (not the 50's).
gjm11 17y ago
Not very much until I know the source of the data and whether I can actually trust it. However, it's certainly not inconceivable that such a correlation might be highly misleading. Here are two simple thought experiments to illustrate this. 1. Suppose that in every country, in every year GDP growth is exactly proportional to government spending the previous year. In other words, spending more produces immediate GDP gains. And suppose that government spending generally changes quite slowly, within certain limits. Then low spending at the start of a decade will correlate with increasing spending over the decade (because of regression to the mean) and therefore with increasing GDP growth over the decade (because of the assumed relationship between spending and GDP growth). So we'll get a graph rather like that one despite the fact that the real relationship between spending and GDP growth is positive. 2. Suppose that GDP growth is entirely independent of government spending, and that it depends on some other characteristics of a country; that high-growth countries tend also to be rich ones (as they would, having grown faster in the past); that all countries would (with equal patterns of taxation and government spending) have roughly equal levels of inequality, so that poorer countries have more really poor people; and that government spending is dominated by attempts to give the poorest people a decent life. Then the poorer countries will spend more, because they have more people who need government assistance to keep out of severe poverty; they will also have less growth (by our assumptions); so we'll see a correlation like the one in the graph, even though there is (by assumption) no causal relationship between government spending and GDP growth. Of course these are both likely to be much simpler than the truth. But then, so is the model you're implicitly relying on if you point to the graph and say "see, government spending inhibits growth" without further analysis. (That model would be something like: GDP growth is purely a function of government spending over the previous decade, and nothing else.)

lionhearted 17y ago

He answered that: > The most common metric for answering this question is taxes as a percentage of GDP. However, high tax rates tend to depress GDP. Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can. For some purposes, a better statistic may be taxes per person He said taxes per person might be a better statistic "for some purposes" - apples and apples comparisons like modern, Western economies might be a good purpose. Apples and oranges comparisons like Japan and Cambodia probably wouldn't be a good purpose.

gjm11 17y ago
My point is that he hasn't given any reason to think that tax / person really is a better statistic for any purpose. I know that he says something that looks, in terms of sentence structure, like a reason, but there isn't actually any connecting logic there. Mankiw's a clever chap, so let's give him the benefit of the doubt and try to see if there's any argument he might be hinting at. Perhaps it's something like this. "Higher taxes tend to reduce GDP. The way this works is that people will work less hard, or take less trouble to do more lucrative and presumably more valuable work, if their taxes are higher. The way this works is that people compare the effort they have to exert with the goods and services they can get, which assuming sensible exchange rates is basically the same thing as absolute income; so demotivation is, so to speak, a function of income; so to measure how demotivated our workers are by tax we should look at their taxes in absolute terms." (I don't know whether that's what Mankiw has in mind, but it's the most plausible argument I can come up with that looks at all like what he said.) I'll also mention another argument for measuring tax per person, which I don't think Mankiw hints at at all but which seems at least as persuasive as his argument: the purpose of taxation is to provide the people with benefits, typically somewhat evenly spread across the population or a substantial fraction of it; so the benefit provided per person is roughly a function of tax per person. There seem to me to be several substantial problems with (what I'm guessing to be) Mankiw'sargument, and also with the other argument I mention above, even if we consider only "modern Western economies". Here are some: 1. The prices of goods and services are not at all constant across countries. Unfortunately, there also isn't any simple relationship between these prices and GDP, so it's not clear how to correct for this. (If relevant goods have prices perfectly constant across countries, demotivation is a function of tax per person. If they have prices exactly proportional to GDP, demotivation is a function of tax over GDP. Neither of these simple cases is common.) 2. Some particular goods, including some of great importance for the sort of demotivational effect I think he has in mind, have prices that correlate very strongly with GDP. Notably, houses tend to be more expensive in more affluent countries and cheaper in less affluent countries. 3. It's well established that most people care a lot about status, which goes along with relative income. So one particular and important "good", namely one's level of relative wealth, does in fact vary more or less in proportion to GDP. This observation is relevant to both arguments: the demotivational force of a given level of taxation will (in so far as it depends on status) be determined by tax / GDP rather than tax / population, and the cost of ensuring that no one is too poor in relative terms will also be determined by tax / GDP. 4. The diminishing marginal utility of money means that the richer a nation is, the more effective an average tax dollar is when spent on scalable things (e.g., infrastructure) or benefits for the worse-off, relative to the benefit it would have provided if it hadn't been taken in tax. (And, hence, also relative to the demotivational effect of taxing it.)