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ian said...
I think you meant "would you turn down that opportunity if ALL your other money making opportunities also pay half as much?"
Suppose that was true for a day. Are there jobs you would turn down at $300 but accept at $600? And if it's true for one day, shouldn't it be true all the time?
No, Ian, because if it was only one day there would be no income effect--only a substitution effect. This is the effect that Mankiw is trying to point out, but it's quite clear that if he ignores the income effect then of course marginal tax rates are distortionary. It should be clear then that Mankiw is begging the question.
If you cut taxes to zero (from the 50% MTR that Mankiw points out) then ALL income opportunities would double, not just a single opportunity, so "student" was correct in his clarification of the question.
Feb 12, 2008, 6:47:00 PM
Posted to Marginal Taxes on the Poor