October 26, 2008

A Harvard economist's take on the Obama tax plan

Greg Mankiw is a professor of economics at Harvard University. He analyzed the effect of the Obama tax plan on his earnings, compared it to the impact McCain's less-confiscatory plan, and came to the following conclusion: What's the point in working hard, when the harder you work, the more you're penalized -- er, forced to participate in the redistribution of your wealth in order to support the societal goal of "fairness."

Here is a question that you may have been thinking about: How do the different candidates' tax plans affect Greg Mankiw's incentive to work?


Let me try to put each tax plan into a single number. Let's suppose Greg Mankiw takes on an incremental job today and earns a dollar. How much, as a result, will he leave his kids in T years?

The answer depends on four tax rates. First, I pay the combined income and payroll tax on the dollar earned. Second, I pay the corporate tax rate while the money is invested in a firm. Third, I pay the dividend and capital gains rate as I receive that return. And fourth, I pay the estate tax when I leave what has accumulated to my kids.

Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids:


For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years.

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.

Don't forget that the numbers that the professor plugged in to his formula are provided by the candidates; we only have Obama's word that he won't raise taxes even higher once he's able to rubber stamp whatever legislation lands on his desk courtesy of Pelosi, Reid and Barney Frank.

But that's okay, 'cause Obama's word is his bond. Like when he promised to accept campaign finance limits so this election would be free of the taint that comes with dirty money greasing the skids into the Oval Office.

What's that? He broke that promise and decided to spend more money than any candidate in the history of the Republic?

Well, I'm sure Obama won't break his promise to only tax the rich.

Or the upper middle-class.

Or the middle class.

Unless, of course, it helps advance the cause of "fairness," funded out of your apparently too-full savings account.

Because, you see, just like he told Joe the Plumber, "It's a good thing to spread the wealth around."

Too bad it's not the job of the government to do it.

Too bad for us, that is, if Obama is victorious.

Posted by Mike Lief at October 26, 2008 11:55 PM | TrackBack


I used to think that Obama speaks to the people that have been raised to believe that there is no such thing as personal responsibility. The government owes you everything...the rich owe you everything.

That is really untrue.

He actually is speaking loud and clear to all of us that DO take responsibility. What is he saying, you ask??? You owe the less fortunate everything. You owe the people who CHOOSE not to work hard some of your hard earned dollars. You OWE them health care, child care and whatever else care they want. Huh????????

What this election season has taught me is that this world is all about the messenger and not the message. George Bush is terrible at communication. He is an awful salesman. He has never been able to convince the American people that what he is doing is right. And, maybe it isn't.

Barrack Obama, though, is a gifted, gifted speaker. He is as good as Reagan if not better. He has actually convinced half of America, if not more, that socialism is the answer to what is wrong with America. SOCIALISM. What am I supposed to teach my kids? "Alexandra, work hard so that you can take care of all the people who don't want to..."

I am very willing to accept the fact that people do fall on hard times. In fact, I am willing to accept (and embrace) the fact that for a short period of time, I should spend some of my tax dollars helping those people. My problem is when this becomes a way of life and an ideology. Now there is a candidate running for those people. He is not encouraging them. He is ENABLING them.

What is even more disturbing is Obama's experience level with respect to the problems facing America...

Economic Experience: little if any experience.
Foreign Policy: little, if any, experience
Leadership Experience: Little, if any experience. He has run NOTHING as a CEO.

Obama is a joke and America is falling for it.

Posted by: RW at October 27, 2008 10:56 PM

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