Thursday, August 11, 2011

Do High Marginal Tax Rates Reduce Economic Growth?

Conservatives Say:  It’ Not Fair to Use Facts, Data and Logic to Answer Questions Like This

Writing in the Financial Times is an economist who on paper seems to have decent credentials.  Robert Barro is a professor of economics at Harvard University and a senior fellow of Stanford’s Hoover Institution.  Of course, the “senior fellow at the Hoover Institution” gives it all away.  (Shouldn’t they maybe change the name there, is Herbert Hoover really the person you want to serve as the role model for economic policy?)

Now Mr. Barro addresses the problem of the deficit.  So naturally his first priority it to cut taxes

So what, specifically, can be done? An effective future tax package would begin by setting US corporate and estate tax rates permanently to zero

thus earning his Conservative “bona fides” while continuing to confuse the rest of us as to why for Conservtives the first step in reducing the Federal deficit is to reduce its revenues.  [Editor’s note:  To be fair, Mr. Barro does go on to suggest other tax increases.]

But Mr. Barro’s main argument is for reduction of marginal rates, the rates applied to each dollar of additional income.

the fiscal deficit should have concentrated on tax reductions, especially those that emphasised falls in marginal tax rates, which encourage investment and growth

Yes, again with the addressing the deficit by cutting taxes.  Does even Mr. Barro know what he is talking about?

Then there is this

The structure of marginal income-tax rates should then be lowered. Marginal rates should particularly not increase where they are already high, such as at upper incomes. 

Since Mr. Barro is a professor let’s put the issue in the form of an exam question.

45.    If in the first 35 years following World War II economic growth was high, and marginal tax rates were very high, and if in the next 30 years marginal tax rates were lowered and growth was lower, and if during the Clinton years marginal tax rates were increased and growth increased, then is it correct that

A.     Lowering marginal tax rates leads to economic growth?
B.     I am an idiot for even asking this question?

Choose your answer carefully class. 

1 comment:

  1. LOL. I love how concise you are. You should be required economic reading for the whole of our citizenry that (tragically)gets its information on matters economic and political from the TV or radio blowhards!