Work Choices, Money, and Status

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Very impressive points.

I worry about this much more near the median of the income distribution than at the very high end.

Very interesting post. I think you’re on to something re: status and labor market decisions. But regarding the quoted material above, this assumes that the median taxpayer is facing a fairly substantial burden already, so that raising marginal rates would push such a person over the edge to homebodyism. The median taxpayer pays little to nothing in federal income taxes though, and most conceive of their payroll taxes as equivalent to forced saving, not taxed dollars lost forever. To make your scenario more likely, the middle-class would have to first be burdened by taxes, a situation that, despite all the rhetoric, is simply untrue.

Upper-middles get it the worst, usually facing the highest average tax rates b/c they can’t plan their way out of taxes. Uppers can engage in such planning, but they still pay a lot of taxes in absolute terms.

Good post. I just want to point out the hypocrisy of those who argue that Mankiw has failed to account for the nonmonetary benefits in his analysis, when they do the same when they bleat about income inequality.

Steve,

I don’t follow you. Didn’t Mankiw use as the base the future value of his $1000 to calculate that 90% rate?

@Arnold_Kling: While Mankiw might be an uncharitable example, marginal tax rates basically eliminate my financial incentive, as a middle-class engineer, to put my tutoring services on the market. It would be nice if that second job would be counted as starting from a separate “income” so it’s not taxed at my marginal rate until it *independently* makes that much income, but obviously they’re not going to introduce that kind of complication to the tax code because of potential for abuse. (“I have 40 one-hour jobs a week!”)

@GU and liberty: Parents would probably be *wrong* to think that the plumbing job is less intellectually stimulating than that credential-driven, lower-paying “professional” job at a non-profit. The plumber will enhance his knowledge every day and have to tackle various different problems, and get to see real, immediate results. All of this is very stimulating.

In contrast, the worker at the non-profit will be doing the same, boring things all day, without developing a real craft, a base of knowledge. They’ll probably just end up dawdling the day away.

And I seem to recall a philosophy PhD who recently wrote a book about the relative joys of Harley repair over white-collar work.

(As an engineer, I will say that my kind of white collar work is, in fact, very intellectually stimulating.)

@AaronG

Good point, married (joint-filing) couples complicate this issue. You and your wife fell victim to the “marriage penalty.” However, many other couples get a “marriage bonus” from joint filing (typically, one high earner and one low earner see a penalty, whereas two similar earners see a bonus)*. I don’t know of any data showing whether penalty, neutral, or bonus is the typical outcome of joint filing (not saying there are no studies).

Another point is that the trend in the U.S. is lower rates of marriage, and thus fewer joint filers. Admittedly I was analyzing the situation in an “all single filers” world, but I think for the two reasons posted here, that it is not a bad approximation for assessing the aggregate situation.

*no general solution to this problem exists where there’s mandated a progressive rate structure and a joint filing system.

My wife became a SAHM, largely because of taxes. We had a child and then twins in quick succession, and were looking at a mid-five-figure daycare bill and a somewhat larger tax bill on her income. So we let her engineering degrees and MBA go idle. We have since discovered a lot of advantages to this new life, but they weren’t obvious before we got into it.

At the time, we thought we were giving up status, not that we were really consciously worrying about it. Her career was high-status to her young-woman peers. But it turns out that working 60 hour weeks and traveling to Asia once a month is not as high-status to her 30-something peers. I’m not sure if this is because her peer group has changed, or gotten older, or because of societal drift over the last 15 years or so; it’s probably a bit of all these. She became a homebody, and maybe her status has gone up.

I guess I think becoming a SAHM is becoming more high-status, and that taxes had something to do with making that possible.

Yancey,

You’re right, and thanks for walking me through that. I’m still uneasy about one aspect of it though: the marginal tax result is sensitive not only to the various rates prescribed by Congress on ordinary income, capital gains, and inheritance, but it is also sensitive to how long the investment compounds.

For example, assume we use Mankiw’s calculus but for simplicity we have 0% income tax, 0% estate tax, 50% corporate tax, 0% capital gains tax. Then, without taxes $1,000 at 8% grows to $10,000. With taxes, it grows instead to $3,000. This gives us a 70% marginal rate.

Now, instead suppose we hold the investment for only 10 years. Without taxes, it grows to $2,000. With taxes, it grows to $1500. Now our marginal rate is only 25%.

As the length of time investment is held approaches infinity, the marginal tax rate approaches 100% under this method. This seems more like an arithmetic quirk than an economically relevant number.

For #2, you are comparing things which go into different utility functions — the PARENTS’ status to the CHILD’s cash income. I’d argue that quite often people choose professions in which they make both less income and disappoint their parents — e.g., the poetry Ph.D. making $13k/year by stringing together a bunch of adjunct-prof jobs, who could have made $40k/year working in an “regular” job not requiring an advanced degree.

To make the status vs. income comparison, you need to compare the status of the person making the income. As in, would the CHILD of the college-educated parents would rather “work for $40,000 a year at a “professional” job than earn $60,000 a year as an air conditioning repairperson”?

Maybe they would, but that’s not the question you’ve asked. And if you did ask that question, I’d say that (a) a lot of air conditioning repairpeople could make $40k/year at an office job, but chose not to because of the money, and (b) if those who have the choice take the office job, it could be due to factors other than status, such as physically easier work, better hours, and the ability to read EconLog at work.

Furthermore, there are a lot of people who do fine at office jobs who would be incompetent and anything mechanical. Not everyone making $40k in an office could make anything at all repairing air conditioners.

In any case, the following is topical:

http://brassmein.com/poppers/jokes/joke_014.htm

A plumber attended to a leaking faucet at the neurosurgeon’s house. After a two-minute job the plumber demanded $150.

The neurosurgeon exclaimed, ‘I don’t charge this amount even though I am a surgeon.”

The plumber replied, “I didn’t either, when I was a surgeon. That’s why I became a plumber.”

>”Most college-educated parents would rather see their offspring work for $40,000 a year at a “professional” job than earn $60,000 a year as an air conditioning repairperson.”

That’s because the parents get the status, but it’s the offspring who sacrifices the money.

If you want to discover the price of status, look for evidence about which job the *offspring* would rather have.

JKB,

Interesting post.

Bessemer was a simple inventor, who….transformed the world by inventing a steel making process that reduced the cost of steel to that of iron…..

Not sure if you know it, but the steel making process was not what Bessemer wanted to accomplish. More than anything else he wanted to sell his new, high powered artillery shell. But the British government refused to ever give him a field trial, so he eventually went to France and got one. But then the French wouldn’t buy it either, because it immediately cracked the (then iron) cannons that were commonly available.

To sell his artillery shell, Bessemer needed lots of cheap steel. That is why he went and invented the steel making process.

…Bessemer’s work was far more meaningful in retrospect, how many parents hope their child will follow his path over that of the statesman?

I’m an engineer and I agree, Bessemer’s work was the more meaningful. Bessemer’s is a path that I’d wish on my children.

But like the fiction writer whose personally favorite novel is a market failure, I’m not Bessemer himself (who never sold his beloved artillery shell) was particularly satisfied. And to Bessemer that steel making process was an incidentally motivated outcome.

Meanwhile, the other big message I keep hearing is that the United States is now intent on making sure its people have every incentive to be less productive.

Strange how the world works, isn’t it?

I agree with those above who pointed out that the “intellectual stimulation” and “meaningfulness” of each job might be misconceived. Still, I think it is often only partly “status” for both parent and child, and partly about what you are taught you want, and also what you are naturally good at, which we do inherit (by nature and nurture) from our parents.

So, my parents are professor and (college-educated) artist; it is not for “status” that 4 kids ended up in academic-type careers. After trying other things, one wandered into philosophy merely because she could think of nothing else; another wandered into economics for the same reason. As a child of an economist with philosophical-bent, this should not be surprising – just as many sons of plumbers choose plumbing.

On this topic, it is interesting to note that even in the Soviet Union during the period when the Party actively tried to enforce a certain “class mobility” and there were no economic factors which might determine a child’s opportunities, the inter-generational mobility remained about the same there as it was in Europe and the US. Most kids still chose their parents’ careers. I don’t think that was status as much as it was choice.

Joe Cushing,

I think a number of people have focused too much on details that Mankiw is only putting in to fill out the hypothetical. For example, when he is discussing the investment taxes, all he is really trying to do is to show you that investment returns are taxed at more than one level along the way. Whatever values he picked for a return, he was always going to be open to the charge of exaggerating by someone, so I suspect that he simply picked the number that pension funds typically use as a benchmark for investment returns. I redid Mankiw’s calculations allowing for returns a factor of two and a factor of four lower than the 8%, and the marginal rate, at the end, was still above 80% and 70% respectively.

Alternatively, you get much more early retirement because it is both high status and relatively more valuable.

I seriously doubt people would “drop out of the workforce”, rather you’d get a lot of high earning people late in their careers retiring earlier rather than making more money or having to be enticed by yet more lucrative prospects.

If those workers are preventing younger people from moving up, then there is likely a slight public good here. If, however, part of the reason these workers commanded such premiums is that the quality of younger cohorts is lower, you’re probably looking at a complete disaster.