Greg Mankiw breaks down what the various marginal tax rates under the McCain and Obama plans really mean to people making money today.
If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.
Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.
Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama’s proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.
The bottom line: If you are one of those people out there trying to induce me 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.
October 27th, 2008 - 1:26 pm
Yes, Obama is making it harder for people who are already rich to save a lot more money and pass it on to their kids after it has been compounding for 35 years because they already have everything they want/need.
October 27th, 2008 - 1:32 pm
Are you implying that this is not the worst thing that could possibly happen to human society?!
PS: Of course, marginal tax rates shouldn’t trouble most people unless they buy into trickle-down theory. What I’d really like to see is some data on how marginal tax rates have affected employment/middle-class incomes.
October 27th, 2008 - 1:45 pm
PPS: If Prof. Mankiw makes another dollar tomorrow and wants to give it to his kids, do we really think that 93% of it should go to other people? Seriously?
October 27th, 2008 - 1:50 pm
And it’s 83% under McCain’s “low-tax” plan.
October 27th, 2008 - 2:00 pm
Yes, they both suck a big one.
October 27th, 2008 - 4:36 pm
Stop being such a socialist, Noah
October 27th, 2008 - 5:52 pm
To be clear, I really don’t know if Obama’s tax plan is good or not. I do think that poor folks should bear much less of the tax burden, but Obama’s plan does seem extreme, that’s for sure. And I really don’t know exactly what extremely high tax rates on the rich will do to the economy.