JONATHAN CHAIT OCTOBER 19, 2010
A week ago, former Bush economic advisor Greg Mankiw wrote a New York Times column asserting that President Obama would be raising his marginal tax rate to 90%, thus dampening his incentive to continue churning out anti-tax propaganda. Michael Kinsley questions Mankiw's math skills:
Mankiw calculates that without the tax changes advocated by Obama, his kids would end up with “about $2,000.” He interprets this as “twice the incentive to keep working,” but it is still a hard-to-defend marginal tax rate of 80 cents on the dollar. So the difficulty, if there is one, is not primarily Obama’s fault. If Mankiw’s marginal tax rate has actually been 80 percent for all these years, it doesn’t seem to have affected his incentives very much, and 90 percent won’t, either.
But in all probability, he does not face a marginal tax rate of anything like 90 percent. Mankiw assumes that his investment earns 8 percent every year and is subject to the corporate income tax at 35 percent and then to the individual income tax at its full fury of 40 percent on whatever’s left. That would be an unusual investment. The top marginal tax rate on dividends and capital gains — the two main ways investors recoup their investments — is 15 percent. If his profit takes the form of interest, paid every year, then there is no corporate income tax. Mankiw owes no taxes on any profits retained by the corporation (if his investment is stock, as he suggests). And to the extent that his return takes the form of a capital gain, it also goes untaxed until he “realizes” the gain by selling the stock. Best of all, if everything goes according to plan and he pops off before cashing in, the entire capital gain disappears for tax purposes.
Mankiw’s assumption of an 8 percent return for 30 straight years seems optimistic. A lower expected return will crunch into a lower effective marginal tax rate. He also assumes that his income will fall in the range where deductions are phased out, thereby effectively increasing his marginal tax rate, but also, in the end, in the range of accumulated wealth that puts him over the basic exclusion of several million dollars.
Of course, Mankiw could always reply that current marginal tax rates are so high that they have dampened his incentive to get the correct numbers. Why bother doing all that math if 80% of your profit is going to be confiscated by government? Or whatever.