Taxation Curves and Poverty Traps

Dan Lakeland has been thinking about taxation curves and the poverty trap.

The short story goes as follows: a graduated tax rate reduces the incentive to increase your income. At the high end, this is probably fine: do we really care if Tiger Woods or Bill Gates makes more money? Really it would be fine if they were to follow the example of Greg Mankiw and reduce their working hours and spend more time with their kids. As he wrote:

The bottom line: If you are one of those people out there trying to induce me [Mankiw] to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.

But at the low end, maybe it’s more of a problem if people have little economic motivation to increase their income. Mankiw displayed this graph:

This picture doesn’t tell the whole story. Despite the flat curve, you’re probably better off making $40,000 then $20,000; for one thing, if you’re at the $40,000 point, it seems like you have a chance to go from there into that happy upward-sloping range.

But, setting practical concerns aside for a moment, Lakeland plays around with some mathematical models of the curves. Perhaps could be useful to some economist somewhere, so I’m linking here and here. Enjoy.

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About Andrew Gelman 26 Articles

Affiliation: Columbia University

Andrew Gelman is a professor of statistics and political science and director of the Applied Statistics Center at Columbia University. He has received the Outstanding Statistical Application award from the American Statistical Association, the award for best article published in the American Political Science Review, and the Council of Presidents of Statistical Societies award for outstanding contributions by a person under the age of 40.

His books include Bayesian Data Analysis (with John Carlin, Hal Stern, and Don Rubin), Teaching Statistics: A Bag of Tricks (with Deb Nolan), Data Analysis Using Regression and Multilevel/Hierarchical Models (with Jennifer Hill), and, most recently, Red State, Blue State, Rich State, Poor State: Why Americans Vote the Way They Do (with David Park, Boris Shor, Joe Bafumi, and Jeronimo Cortina).

Andrew has done research on a wide range of topics, including: why it is rational to vote; why campaign polls are so variable when elections are so predictable; why redistricting is good for democracy; reversals of death sentences; police stops in New York City, the statistical challenges of estimating small effects; the probability that your vote will be decisive; seats and votes in Congress; social network structure; arsenic in Bangladesh; radon in your basement; toxicology; medical imaging; and methods in surveys, experimental design, statistical inference, computation, and graphics.

Visit: Andrew Gelman's Website

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