Oh, yeah, he's also the Romney campaign's economic policy adviser.
Mankiw squawks about "tax[ing] consumption rather than income" and simplifying the tax code. Unfortunately, he completely ignores the distributional effects of consumption-based taxes, and he tries to slip one by us when he suggests that "our progressive income tax could further evolve toward a progressive consumption tax". For that to be true, we have to pretend assume that 1) effective tax rates in the US are actually progressive and 2) rich people consume proportionally more than poor people.
In fact, just the opposite is true. As Mitt Romney's newly released tax returns show, the US tax system is not progressive at all, but rather, it's somewhat regressive. American Progress provides a fancy little graph that demonstrates this:
Well, there goes one argument. And here goes the second one: Crunching a bit of data from the BLS (pdf) reveals Mankiw's "progressive consumption" fallacy:
That's not a mistake. The poorest 20% of Americans, whose before tax incomes (I used pre-tax instead of post-tax incomes since we're talking about shifting from income to consumption taxes, not that it makes much difference in the relative ratios) range from just over $10,000 to around $18,000 per year have to spend almost twice what they earn on necessities like food, electricity and healthcare. Compare that with the necessary consumption of the richest 20%. There's obviously a downward trend there, and I would bet money that if the data were extended to include micro-level data (i.e. per person), that trend would continue, eventually reaching near-zero for the top few earners (cough, cough, "earners").
So, a consumption tax would actually be far more regressive than the current rates people end up paying. That means if I'm really poor, I'd actually be taxed on 200% of my income, while rich people would be taxed on less than 50% of theirs.
The piece also addresses negative externalities, invoking the oft-cited example of anthropogenic (man-made) climate change. That's funny, considering some of his boss's past comments, but we'll overlook that and focus instead on his "gasoline tax" idea.
Mankiw is absolutely right that a tax on gasoline would help reflect the true social cost of driving, just like taxing coal-burning power plants would help reflect the social cost of SO2 and arsenic pollution, but so would ending fossil fuel subsidies. Of course, Mankiw knows that it's not politically feasible to implement a tax on something that people rely on, and if he were a responsible, non-partisan economist, he would suggest (or at least mention!) the role subsidies play in distorting the markets and further embedding externalities in our economic model.
There are some other mistakes in the post, e.g. the idea that people who are taxed more will work less. That's not really true at all, intuitively or theoretically. Consider a rational actor who is utility-maximizing. If his utility is a function of his consumption, and if his consumption is a function of his post-tax income, and if his post-tax income is a function of wage rate multiplied by the number of hours he works, then maximizing his utility will necessarily require maximizing the number of hours he works, to some threshold, of course. Remember, it's all about wealth/utility/profit. Now, I don't necessarily agree with that idea, but it's the theory that Mankiw espouses, so why not use his own rationale to discredit his fundamentally silly argument(s).
That's all. The point about subsidies reminded me of an article I read the other day, so I'll blog about it when I get a chance.
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