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What will be left in the cigar box?

October 27, 2008

Greg Mankiw looks at how the Obama and McCain tax plans affect your ability to save and accumulate wealth, taking into account corporate taxes, divedend and capital gain taxes, and estate and gift taxes:

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.

It looks like there's a lot of "wealth spreading" going on already. Or, actually, wealth destruction, as money taken in taxes doesn't get spread to the needy via some scientific leveling process. It gets spent on favored political constituencies, and often is spent inefficiently. Economists call this "dead-weight loss," a polite term for "waste."

Tags: tax policy.

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