Incentives of the Rich and Famous

Greg Mankiw finally answered the question that we've been waiting all election season to find out: "How will John McCain's or Barack Obama's tax proposals affect Greg Mankiw?"

Of course, that's not the question he's really asking, but it sure is fun to phrase it that way! Instead, he's really asking a much more fundamental question: "How will either Barack Obama's or John McCain's tax proposals affect the incentives that those at the top end of the income spectrum have to invest in the U.S. economy?"

That's an important question to answer because even small percentage changes in how much income is taken away from those earning income at these levels represent huge sums of cash. It's the kind of big money that top income earners can put to productive work in the economy that can either launch a new economic boom or that can seal an economic bust if they choose otherwise.

And that's why we've created the tool below. We compare both John McCain's and Barack Obama's tax proposals to current law, so we can compare whether or not either presidential candidate's tax proposals will increase incentives to invest compared to current law (or each others) or will encourage the well-to-do to just sit on the economic sidelines.

Better still, we also make it possible for you to test drive different tax policy scenarios yourself. Just modify our default data as you see fit, and we will effectively give you the power to manipulate the behavior of the rich and famous too. How cool is that?!

Tax Proposal Data
Input Data	Current Law	McCain	Obama
Highest Income Tax Rate [%]
Capital Gains and Dividend Tax Rate [%]
Medicare & Social Security Tax Rate [%]
Estate Tax Rate [%]
Corporate Income Tax Rate [%]
Tax Proposal Data
Rate of Return on Corporate Capital Before Taxes [%]
Length of Investing Period in Years [or Remaining Life Expectancy]

Incentivizing the Rich and Famous
Calculated Results	Current Law	McCain	Obama
Future Value of Each Dollar Earned and Invested Today By End of Investing Period
Percentage of Future Value Earned and Invested Compared to Current Law
Increased Incentive to Earn and Invest More Money?

For this tool, we are assuming that the capital gains tax rate and the tax rate applied to dividends are equal. As an aside, we note that the Wall Street Journal article from which Greg Mankiw extracted the data didn't account for Medicare taxes (1.45%) which applies to all income under current law. Barack Obama's proposal to eliminate the taxable income cap for Social Security adds 6.2% to this figure, which we should also note will increase the risk that the program will not be able to support promised benefits to Social Security recipients in future economic downturns.

Beldar further explains why this all matters:

Wealth grows out of work done at the margin. New jobs are created out of work done at the margin and the investment dollars that work generates.

Someone living paycheck to paycheck is contributing to the economy, but he or she isn't going to be the guy or gal who's actually helping to grow the economy in a significant way. But when you have someone who's making it okay — who's getting by — and he's considering whether to do the additional work needed to generate that marginal dollar, his decision whether to do the work or not is going to relate in a very big way to what happens to that dollar.

That's just a sampling. As they say, read the whole thing....