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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

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.)
- lionhearted 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. It's valuable to look at different statistics in metrics in most endeavors. No statistics are perfect, but it's good to check out different ones. Take baseball, for instance. You have batting average (the percent of times a hitter gets a hit) and you have runs scored (runs are baseball's equivalent of "points" or "goals" for people unfamiliar; you win by having more runs than your opponent). The usual way people look at tax burden is looking at percent of GDP - batting average, so to speak. But it's also worthwhile to look at runs scored. Why is that? Well, maybe batting average isn't the only way to win games. Baseball used to be obsessed with batting average, but neglected a more subtle and advanced statistic called "on base percentage" for years. If you did an analysis of runs scored, you'd find you need on base percentage more than batting average. If you did an analysis of taxation that showed that you could have higher tax yields without taxing a higher percentage of GDP, that'd be well worth knowing. At the very least, it's a number worth looking at. > Perhaps it's something like this.... 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. Actually, the largest reason taxes reduce GDP isn't motivation. It's that the government doesn't invest in the same thing as individuals. When you take taxes from, say, Sergey Brin, and put them under the control of the Senate, that money is going to be spent differently. Brin's money is far more likely to grow the GDP of the United States for the future than whatever the Senate spends it on. The Senate funds some things that produce returns (quality infrastructure, science), some things that help maintain things (a bit of law enforcement, courts), and then a lot of things that don't produce returns. Individuals reinvest in productive endeavors at a much greater rate. Taxation moves resources from the control of people who are more interested in reinvesting and growing their investments to politicians, who are primarily interested in getting re-elected. > the purpose of taxation is to provide the people with benefits The purpose of taxation is to increase the revenues that the taxing authority collects. How those revenues are spent are up to the authority. Some governments provide benefits to the people, some buy weapons and try to take over their neighbors, some just steal the money outright. Taxation is sold as providing benefits to the people, but that's not necessarily how the tax yields are spent. > 1... 2... 3... 4... I agree with some of those arguments, disagree with others. But the main point is he's not offering a Swiss Army Knife that measures everything, he's just pointing out another number we can look at and take into consideration. To go back to baseball, it's good to look at batting average, on base percentage, isolated power, runs scored, pitches taken, and a number of other factors - there's some great players that have a low average and low on base, but hit with lots of power so they're good. All things being equal, you'd like to have your players take more pitches and wear the other side out. There's a hidden value in a player that takes 1 extra pitch per appearance even if he's just an average player - he'll take 4-5 extra pitches a game, which might mean wearing the opposing pitcher out who has to be taken out. That means your teammate will face a worse pitcher. If you can get a full team of players that take a lot of pitches, you might see spend 10% of the game facing the opposing team's worse reliever when the guy who started the game gets tired and has to be taken out very early. But if you said - "let's only look at pitches taken", you'd be crazy, because it's useless by itself. If you said, "let's only look at runs scored" you'd be crazy, because it's also about how your teammates do after you get on. But that doesn't mean you should only look at batting average either - or you won't have a complete picture. It's worth looking at all the numbers, so I'm happy this number was brought up for thinking about.

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.)

lionhearted 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. It's valuable to look at different statistics in metrics in most endeavors. No statistics are perfect, but it's good to check out different ones. Take baseball, for instance. You have batting average (the percent of times a hitter gets a hit) and you have runs scored (runs are baseball's equivalent of "points" or "goals" for people unfamiliar; you win by having more runs than your opponent). The usual way people look at tax burden is looking at percent of GDP - batting average, so to speak. But it's also worthwhile to look at runs scored. Why is that? Well, maybe batting average isn't the only way to win games. Baseball used to be obsessed with batting average, but neglected a more subtle and advanced statistic called "on base percentage" for years. If you did an analysis of runs scored, you'd find you need on base percentage more than batting average. If you did an analysis of taxation that showed that you could have higher tax yields without taxing a higher percentage of GDP, that'd be well worth knowing. At the very least, it's a number worth looking at. > Perhaps it's something like this.... 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. Actually, the largest reason taxes reduce GDP isn't motivation. It's that the government doesn't invest in the same thing as individuals. When you take taxes from, say, Sergey Brin, and put them under the control of the Senate, that money is going to be spent differently. Brin's money is far more likely to grow the GDP of the United States for the future than whatever the Senate spends it on. The Senate funds some things that produce returns (quality infrastructure, science), some things that help maintain things (a bit of law enforcement, courts), and then a lot of things that don't produce returns. Individuals reinvest in productive endeavors at a much greater rate. Taxation moves resources from the control of people who are more interested in reinvesting and growing their investments to politicians, who are primarily interested in getting re-elected. > the purpose of taxation is to provide the people with benefits The purpose of taxation is to increase the revenues that the taxing authority collects. How those revenues are spent are up to the authority. Some governments provide benefits to the people, some buy weapons and try to take over their neighbors, some just steal the money outright. Taxation is sold as providing benefits to the people, but that's not necessarily how the tax yields are spent. > 1... 2... 3... 4... I agree with some of those arguments, disagree with others. But the main point is he's not offering a Swiss Army Knife that measures everything, he's just pointing out another number we can look at and take into consideration. To go back to baseball, it's good to look at batting average, on base percentage, isolated power, runs scored, pitches taken, and a number of other factors - there's some great players that have a low average and low on base, but hit with lots of power so they're good. All things being equal, you'd like to have your players take more pitches and wear the other side out. There's a hidden value in a player that takes 1 extra pitch per appearance even if he's just an average player - he'll take 4-5 extra pitches a game, which might mean wearing the opposing pitcher out who has to be taken out. That means your teammate will face a worse pitcher. If you can get a full team of players that take a lot of pitches, you might see spend 10% of the game facing the opposing team's worse reliever when the guy who started the game gets tired and has to be taken out very early. But if you said - "let's only look at pitches taken", you'd be crazy, because it's useless by itself. If you said, "let's only look at runs scored" you'd be crazy, because it's also about how your teammates do after you get on. But that doesn't mean you should only look at batting average either - or you won't have a complete picture. It's worth looking at all the numbers, so I'm happy this number was brought up for thinking about.