Accounting for a Detoured Economist

Does Raising The Marginal Tax Rate on the Rich Change the Behavior of the Rich? The answer isn’t as obvious as you may think…especially in economic circles. There is an interesting debate going on in the economics blogosphere in regards to the optimal taxation rate.

Robert Frank, from the New York Times recently wrote…

Trickle-down theorists are quick to object that higher taxes would cause top earners to work less and take fewer risks, thereby stifling economic growth. In their familiar rhetorical flourish, they insist that a more progressive tax system would kill the geese that lay the golden eggs. On close examination, however, this claim is supported neither by economic theory nor by empirical evidence.

Dr. Mankiw, who wrote two of my textbooks while in college and still looks younger then I do, responded…

[Robert] is perfectly free to believe whatever he likes and to advocate increasing the top marginal tax rate. But to suggest that there is neither theory nor evidence to support the beneficial effects of lower marginal tax rates on high-income taxpayers indicates a lack of appreciation of the academic literature in public finance.

If you are interested in this type of theory you should read the entire post here and the follow-up found here. Definately a good read.

Dan Meyer over at Tickmarks wrote a post about the recent Forbes article listing the top cities that save their money in the US. Dan notes…

Reading between the lines: education appears to be directly related to good Nest Egg performance while raising children appears to have at least a slight negative relation (my guess is that most of the cities listed above are cities where comparatively low proportions of adults are raising children). I would have liked more detail on how the criteria were applied.

The top cities are places like San Jose, San Francisco, Los Alamos (NM), and Fairfield County (CT). Dan is quite right to think that education level has something to do with who is on this list, but I believe he is skipping an important link. During the acquisition of my degree in statistic I was exposed to the idea of interactions. Interactions are defined (non-technically)…

An effect of interaction occurs when a relation between (at least) two variables is modified by (at least one) other variable. In other words, the strength or the sign (direction) of a relation between (at least) two variables is different depending on the value (level) of some other variable(s). (The term interaction was first used by Fisher, 1926). Note that the term “modified” in this context does not imply causality but represents a simple fact that depending on what subset of observations (regarding the “modifier” variable(s)) you are looking at, the relation between the other variables will be different.

[ Yes I stole that definition…who memorizes statistics definitions ]

In this case the two variables Dan identifies are education and propensity to save, a positive correlation (the more educated you are…the more money you tend to save). I submit that this explanation does not explain the results robustly. Think of all of the social work, english, and (insert your own random major) that are highly educated and utterly broke. A high education level with a low pay scale will never result in a large savings rate. In this case the more obvious reason for the higher savings rate is a higher income. Think about it. All of the areas listed have highly educated, highly compensated, people with large amounts of discretionary income to sock away from their tech, engineering, and government jobs. In this case you could say that education and income are correlated, education and savings rate are correlated, and income and savings rate are correlated. But it seems pretty obvious that income would be more strongly correlated to savings rate then education level (on average).

Malcolm over at McLelland-On the interdisciplinary science of accounting wrote an interesting follow-up to my Why Auditing = Appalling Hours and Tremendous Turnover post last week.

In his response, Why Do Accountants Have To Work Longer Hours, Dr. McLelland wonders…

…for the past several years whether the inability of accountants to make (what they consider) a decent living working 40 hours per week doesn’t have more to do with accountants’ inability to optimally self-regulate from the public’s perspective.

he continues… 

In the end, I think it would be relatively straightforward to put together an equilibrium model explaining why accountants (1) are working longer and harder (… albeit for more money), and (2) not really using the breadth and depth of knowledge and skills they have (or should have).  More on this later …

I have trouble arguing his logic.  From my limited knowledge of the profession I have come to similar conclusions.  I often wondered if this was just a function of the firm I work for, or a more general industry problem.  I think the answer is the latter.

I almost concluded my last post with a hypothesis that the accountants don’t seem to be efficiently earning higher salaries…they are just earning more through overtime.  I believe that the marginal dollar earned per hour is actually staying stagnant while the hours work are increasing…which leads to the appearance of a larger paycheck…but in real terms this is not an increase in earning power…just an increase in work.