Monday, November 8, 2010

Tax Burden "think of the children"

In the next paragraph, I'm gonna send you off to the blog of Greg Makiw, econ prof at Harvard, and the author of the std Econ 101 text that will probably replace Samuelson's.  I want you to know that I don't mean this to have political implications for the election at hand (written in Fall 2008) and Prof Mankiw says he doesn't either.  I think he's acting like a good teacher and using the current intense public focus to motivate us to learn an economic lesson.
He imagines he earns an "extra dollar" and computes the additional value he will be able to leave his children.  Economists call this marginal thinking; engineers are likely to call it AC gain;  physicists would call it sensitivity; mathematicians would call it a Taylor series expansion.  He computes the additional value that would flow to his children under three tax regimes: no taxes, current regime and increased taxes.
Tax Regime     Additional value to the kids
No taxes        $28
As now          $15
Higher           $1.85
I wrote him a note asking him if the calculation wasn't much more general and showed the deadweight burden of taxation on wealth creation.  He wrote back and agreed the calculation was quite general.

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