Sunday, October 26, 2008

Time to Enjoy President Obama

If you do not mind having nightmares, I recommend reading Professor Mankiw's article comparing the McCain and Obama tax plans. He calculates that, relative to McCain's, Obama's tax plan almost triples the price of his children's consumption after the good Professor is dead.

He takes the candidates' tax plans literally. Doing so is, of course, appropriate for the purposes of evaluation and debate. But taking candidates literally is ridiculous for the purposes of forecasting. Just as we know that Coke and Pepsi are far more different in marketing than they are in chemical composition, we know that Democrats and Republicans are far more different in rhetoric than in practice. The president is not a dictator (even dictators aren't dictators, but that's another story) -- the winner Nov 4 will have to deal with the same Congress, interest groups, and ultimately re-election as would the other candidate if he had won.

Second, most of the price-tripling result comes from the capital tax side. Because Professor Mankiw expects to live about 35 more years, the President during the next eight is hardly relevant. Indeed, if it were true that Obama would be a heavy taxer, Professor Mankiw and his kids might be better off if Obama gave a vivid demonstration of the harms of heavy taxation before they realized their capital gains in the year 2043.

Third, even if it were true that Obama and McCain would set labor tax rates that were consistent with their rhetoric, I am even more dubious that capital tax policy would follow that rhetoric. Look at western European countries. They have a lot more socialist talk than the U.S. does, and have some hefty labor tax rates to back it up. But their capital tax rates aren't so high. For a decade now, U.S. Republicans have been pointing to western Europe as a model of corporate taxation.

Fourth, capital taxation will likely be driven by the politics of elderly baby boomers. Unless one of the candidates plans to exterminate baby-boomers, they both will have to deal with them, as will the next several of their successors. For example, hiking the capital gains tax may work in the short run because the baby-boomers don't have any. But eventually they will (if nothing else, inflation will deliver some), and any good politician (regardless of party) will float a capital gains tax cut in order to obtain baby-boom support [I don't claim to know everything about the politics of capital taxes --- my point is that these politics are subject to the fundamental forces of supply and demand, which cannot be altered by the political party of the president].

My forecast: an Obama victory would be good for Professor Mankiw's kids (http://www.econ4obama.com/). Yes, I expect there would be an infinitesimally larger price of their consumption and, therefore, they will spend just a bit more time with Dad than they would have under McCain. Maybe kids and father can use that bit of extra time together to enjoy President Obama's eloquent and memorable (and, admittedly, substance-free) speeches!

2 comments:

Sheng said...

"even dictators are not dictators", this is absolutely true and a nice quote! My readings of Chinese history tell me that...

Dominique said...

Interesting... So that means that Mr. Obama will not be able to effect much of a Change, after all. The only reason for voting for him is...the entertainment value?