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« Do you have an accent after all? | Main | Sold! » Thursday, November 30, 2006How taxes affect career choiceIn response to a question from an undergraduate, the Harvard economist Greg Mankiw offers a tidy explanation of how taxes can "distort" people's choices over how to spend their time. (The student says he doubts that most people even notice a shift of a couple of percentage points either way in the tax rate.) But what especially struck me was Mankiw's discussion of a much-buzzed-about New York Times story, in which the author profiled several people who headed to Wall Street so they could become truly rich, not just prosperous. Memorably, the author focused on a cancer researcher, but there was also an academic economist. Of the economist, Mankiw says: Based on the article, he seemed a bit wistful about leaving an academic job behind. At a higher tax rate on his new higher income, might he have stayed with the perks of the ivory tower? Perhaps. But, based on market prices, his talents are more productively applied in private equity, where he is filling the important role of allocating the economy's capital stock. If he gave up that job because of a higher tax rate, the loss to the overall economy would be measured by the deadweight loss. Many observers of higher education have suggested that it's a tad depressing how many talented college seniors head directly to Wall Street without considering other paths. (Similarly, letter-writers to the Times, including the Harvard psychologist Howard Gardner, seemed to find the cancer researcher's decision to pursue riches especially distasteful.) But Mankiw neatly turns this p.c. instinct on its head. An underheralded problem, his argument implies, is the "deadweight loss" to the economy caused by smart people who could land a job on Wall Street, but choose, instead, less economically productive pursuits like teaching, studying biology, or joining the military or the CIA. (One wonders how many people stay reluctantly in such jobs because of the higher tax rates endured by investment bankers.) Posted by Christopher Shea at 11:34 AM
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