Harvard economics professor Greg Mankiw talks dollars and cents by comparing the McCain and Obama tax plans to the status quo. He presents a straightforward calculation anybody can follow. But through the magic of television and the news and despite the armies of pundits, most readers will be seeing the numbers for the first time. That’s sad.
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.
Now some wag will probably ask, ‘why not lower taxes even further’. The answer is that we need to collect some monies for the common good. So it all depends on what we value as a common good. If you did the calculation for someone who didn’t pay taxes but expected to receive money from the government, the higher the tax rate on those people who do earn, the better for you.