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Posts Tagged ‘Top Tax Rate’

Back in 2009, I narrated a video about the downsides of class-warfare tax policy.

But if you don’t want to spend eight minutes watching the video (or 14 minutes watching this video), here’s a visual that summarizes why high tax rates discourage people from engaging in productive behavior.

The most important thing to understand is that a high marginal tax rate (i.e., the tax rate on earning more money) has a big effect on incentives to work, save, invest, and be entrepreneurial.

But how big is that effect?

Let’s review some new research from Professor Charles Jones.

The classic tradeoff in the optimal income tax literature is between redistribution and the incentive effects that determine the “size of the pie.” …However, what is in some ways the most natural effect on the size of the pie has not been adequately explored. …To the extent that top income taxation distorts…innovation, it can impact not only the income of the innovator but also the incomes of everyone else in the economy. …High incomes are a prize that partly motivates entrepreneurs to turn basic insights into a product or process that ultimately benefits consumers. High marginal tax rates deter this effort and therefore reduce innovation and overall GDP. …For example, consider raising the top marginal tax rate from 50% to 75%. …the change raises about 2.5% of GDP in revenue before the behavioral response. In the baseline calibration…, this increase in the top tax rate reduces innovation and lowers GDP per person in the long run by around 7 percent. …even redistributing the 2.5% of GDP to the bottom half of the population would leave them worse off on average: the 7% decline in their incomes is not offset by the 5% increase from redistribution. In other words, raising the top marginal rate from 50% to 75% reduces social welfare…the rate that incorporates innovation and maximizes the welfare of workers is much lower: the benchmark value is just 9%.

Here’s a table from the study showing how the optimum tax rate is very low if the goal is to help workers and society rather than politicians.

If you want more evidence, there’s a never-ending supply.

But if we want to be concise, start with this list.

Heck, higher tax rates can even hurt your favorite sports team.

P.S. Joe Biden wants people to think that it’s patriotic to pay more tax, though he exempts himself with clever tax planning.

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I mentioned yesterday that Senator Johnson of Wisconsin did a good job at the Senate Budget Committee’s hearing on tax reform. Today, I want to elaborate on two of his points.

First, he asked all three of the witnesses what the maximum marginal tax rate on any American should be. The two leftists on the panel, Len Berman and Diane Lim Rogers, hemmed and hawed because they (correctly) smelled a trap. But the Senator persisted and Len said something in the range of 45 percent and Diane said 70 percent-80 percent. This matters because recent polling data shows that the vast majority of Americans don’t want any of their fellow citizens to ever pay more than 30 percent.

Most Republicans aren’t smart enough to focus on arguments that are simultaneously economically sound and politically effective, so kudos to Senator Johnson.

The Wisconsin lawmaker also hit hard on the notion of phony spending cuts, a point near and dear to my heart (as you can see by these interviews with Judge Napolitano and John Stossel).

I touched on this yesterday, but I want to share a chart that Senator Johnson used during the testimony. As you can see, Obama’s budget doesn’t call for any budget cuts.

When Obama released his budget, I did a post showing how annual spending was going to be $2 trillion higher in 10 years than it is today. But I think I’ll steal Senator Johnson’s chart since it makes the same point more dramatically.

I’ve already confessed to having man crushes (in the philosophical sense) on Chris Christie, Marco Rubio, and Rand Paul. If Senator Johnson continues this good work, I may have to become really promiscuous.

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