October 27, 2008

Those Adorable Little Mankiw Kids

I doubt that a lot of ThreeSourcers spend a lot of time worrying about the future inheritances of children of Harvard professors. But -- just for today -- tune in, this is pretty instructive.

Professor Mankiw suggests that his present personal needs are pretty close to sated, but that additional speaking and writing engagements would allow him to bequeath a little more to his three children. He compares the marginal effect of earning an additional dollar under the McCain, Obama, and Eidlebus '12 tax plans:

If there were no taxes [Eidlebus] 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.

Disincentives to additional work from most Ivy League professors mightn’t be such a bad idea, but I thank Mankiw for this illustrative example that will be reflected in every industry and sector: $1.28 out of $28.00

UPDATE: I'm a little late to the party, I see that Instapundit and Hugh have both linked to this. Just the same, I think it needs the weight of ThreeSources behind it.

2008 Posted by John Kranz at October 27, 2008 2:17 PM

Do you see? DO YOU SEE?

The way to prosperity AND liberty is...

Vote Eidelbus in 2012. :)

Posted by: Perry Eidelbus at October 27, 2008 9:04 PM

He's being awfully coy about picking his running mate, isn't he?


Posted by: jk at October 28, 2008 10:59 AM

You might already be beaten to it. A friend will similarly run in 2012, and we want to register in at least a few states so our friends can actually vote for us.

So on one ticket, he'll be my running mate. On the other ticket, I'll be his! :)

Posted by: Perry Eidelbus at October 28, 2008 12:29 PM

Okay, but don't expect my 18 million supporters to blindly support you. Or my wife to campaign on your behalf.

Posted by: jk at October 28, 2008 12:53 PM

For the benefit of those who didn't read the Mankiw blog, t1 through t4 are various 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.

And from the WSJ article that Mankiw cites:

In sum, Mr. Obama is proposing to use the tax code to substantially redistribute income -- raising tax rates on a minority of taxpayers to finance tax credits and direct income supplements to millions of others. How much revenue his higher rates would raise depends on how much less those high-earners would work, or how much they would change their practices to shelter their income from those higher rates.

By contrast, Mr. McCain is proposing some kind of tax reduction for most Americans who pay taxes. He says he would finance those cuts by reducing the rate of growth in federal spending.

Stiflingly punitive taxation vs. tax reduction - you decide.

Posted by: johngalt at October 28, 2008 1:22 PM

No excuses for not reading Mankiw. Snotty Harvard kids have to pay $50K a semester -- you just have to click.

Posted by: jk at October 28, 2008 4:36 PM | What do you think? [6]