Monday, October 27, 2008

Putting the Incentives in all the wrong places

From a Harvard Economic Professors Blog:

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?


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.


Scott said...

Poorer, yes. But they will have health care, housing and income (ala refundable tax credits) from our friend, big government.

The tax code has become a means to induce certain behavior. There is such a thing as tax neutrality (at least theoretically) whereby taxes have no (or very little) effect on productivity, meaning that there is some place for taxes without being punitive. Notwithstanding, we're way beyond that and left with annual tweaks that favor certain constituencies at the expense of others. Flat tax anyone?

Macon said...

Housing and Income from the government equals The Dole.

I really believe that "working" for your housing and income, rather than "deserving it by merely existing" is far better for a human.

People need to read more science-fiction to have an imagination about the far reaching effects of societal choices.

Science Fiction: is there anything it can't do?

Paul Stokes said...

How about 2 Thess. 3:10? Paul writes, "For even when we were with you, we gave you this rule: 'If a man will not work, he shall not eat.'"

Paul's model is working day and night. ibid at v. 8

I will concede, however, that people treat the scriptures as if the scriptures are science fiction.

Christianity is kind of tough. See, for example, Mt. 21:18 and 19. Jesus makes Paul seem rather tame. (Gee, I thought Paul is the guy who remade Christinity into something tough. I always thought Jesus was so sweet.)

Paul Stokes said...

The Nanny State is Baal made flesh.

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