Even the higher marginal tax rate that you don't pay directly can still push you, and everyone, into poverty

My lastest guest-post tonight at HughHewitt.com is about taxes and spreading the wealth. I argue that "those higher taxes cannot possibly be crafted so that they just affect rich old Peter over there — not by a smart Harvard economics professor, and not even by Barack Obama."

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[Copied here for archival purposes on November 5, 2008, from the post linked above at HughHewitt.com.]

(Guest Post by Bill Dyer a/k/a Beldar)

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.

Harvard economics professor Greg Mankiw looks carefully at how the candidates' respective tax plans will affect that marginal dollar, and his analysis is clear enough that I'll forgive him for speaking of himself in the third person (h/t InstaPundit):

Let's suppose Greg Mankiw takes on an incremental job today and earns a dollar. How much, as a result, will he leave his kids in T years?

The answer depends on four 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.

Mankiw makes a couple of reasonable assumptions about pre-tax return rates and the length of time for his investment before his kids get it, and then he runs the math, which returns these conclusions (emphasis mine):

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....

From this, Prof. Mankiw concludes that if Obama's tax plan becomes law, he's unlikely to do the extra work to earn that extra dollar. He'll spend the time trying to make good memories with his kids instead of trying to make money for them to inherit.

When you rob Peter to pay Paul, it's not some zero-sum game. Peter's been the guy working harder. When you systematically rob him to pay Paul — when you "redistribute the wealth" — then Peter figures it out, and he stops working harder. He stops creating more wealth at the margins. And eventually, you've guaranteed that Peter and Paul will both slip into destitution.

Democrats stare at me perplexedly. "Dyer!" they say, "You don't make a quarter million a year! The Obama tax increases won't hit you! And what kind of idiot are you, that you don't want the hand-out from Barack Obama's tax cuts and the give-aways from Obama's new social programs?"

I'm the kind of idiot who (a) would still like to make a quarter-million some day, who (b) doesn't think Peter should be penalized with a higher tax rate for his success, and who (c) wants his kids to have a chance to land the jobs where they can make that much or more in the businesses created by Peter after he decided to keep working a little harder to make the extra dollars to invest (i.e., risk) in starting those businesses. I won't take his damn bribes — even if I trusted Obama to deliver them, which I don't — because it hurts all our futures to have high taxes. Even when you're not taxing me directly with those higher rates, those higher taxes will still affect me. "Spreading the wealth" ultimately makes us all poorer. Those higher taxes cannot possibly be crafted so that they just affect rich old Peter over there — not by a smart Harvard economics professor, and not even by Barack Obama.

Most of us want to become Peter; most of us realize it's unfair to penalize Peter for being successful; but regardless, we all need Peter.

— Beldar