Conservative Economist Greg Mankiw Shows He Knows Nothing About Taxes

Doesn’t Stop Him From Opining on Them Though

In the Bush fils administration a conservative supply side economist named Greg Mankiw was in vogue.  He went out of vogue when it became apparent he did not know what he was talking about.  Now he is demonstrating that again, with a tax policy piece in the NYT.  First there is this.

INCOME VS. CONSUMPTION Many economists have argued that taxes should be levied based on consumption rather than income. Consumption taxes would do less to discourage saving and investment and would thus be more favorable to economic growth. In addition, consumption taxes are arguably fairer: They tax the standard of living people enjoy rather than the value of what they produce.

Wow, amazing just how much ignorance can be packed in that one paragraph.

First of all the idea that many economists believe taxes should be on consumption is un-quantified and does not reflect opinion that consumption taxes restrict demand, which is why governments tax cigarettes and alcohol.  And the idea that consumption taxes do more to stimulate investment and growth is just plain wrong, because again, they reduce demand which is the driver of investment and growth.

But the real whopper is this idea that consumption taxes are fairer.  No they are not.  Consumption taxes like sales taxes are regressive, which is why many states exempt or reduce sales taxes on food or medicine.  The reason taxes on things like entertainment are so high is to make sales taxes less regressive.  They don’t tax the standard of living, as every millionaire knows.  And income taxes don’t tax the value of what people produce, they tax the profit that firms make and income taxes fit the general requirement of taxes.  Income taxes are based on an ability to pay and on value received from government services. 

But the real illustration of the lack of understanding is this.

The House plan moves toward a consumption tax by allowing businesses to deduct their investment spending immediately, rather than depreciating it slowly over time. By exempting the income that businesses reinvest, the government would essentially be taxing consumed profits.

See all that happens with immediately expensing investment rather than depreciating it is timing.  If a company invests $10 million in equipment it gets to deduct that $10 million before computing its taxes.  With depreciation that deduction is spread over time, much of it coming in the first year.  With expensing all of it comes in the first year.  So with expensing a company’s tax bill goes down, then goes up as it has no more tax depreciation.  The only benefit is what economics calls ‘the time value of money’, which in a low interest rate environment is minimal.  The net effect of the policy, nothing, nada, no change in behavior.  Just an example of stupidity.