Friday, July 26, 2013

Even The Economist, a Great Magazine, Gets Taxes Wrong

No the U. S. Does Not Have Too High a Marginal Tax Rate

One of the problems with conventional wisdom is that it is neither conventional nor wisdom.  Take taxes for example.  Conventional wisdom says that high marginal tax rates discourage economic investment and economic growth, and thus are counter productive with respect to sound economic policy.  This seems so obvious that even highly respected journals like The Economist are prone to print that conclusion without any supporting evidence.  Here is what The Economist says in an article on tax reform proposals.

The Economist depicting the U. S. tax code

Both want to address the tax code’s two big problems. First, it is inefficient: it imposes high marginal rates on individual and corporate income, which discourages work and investment, 

Really, and what supporting evidence does this otherwise excellent article on tax reform provide for this conclusion?  Absolutely none, it is just presented as a given.

Now it is true that an overly high marginal tax rate, say 70% or higher would discourage investment and work, but the tax rate in the U. S. is not currently so high as to discourage work and investment.  How do we know this, two reasons.

  1. The U. S. has had much higher investment and growth in the past with higher marginal tax rates.

  1. There is no documented evidence, research or anecdotally that investors say things like “Gee, that a great opportunity but the taxes are too high for me to invest?”

But the idea, particularly among conservatives is that if somehow the marginal tax rate could be lowered all sorts of magical things would happen.  Oh really?  Take a look at the Bush tax cuts and their results, huge deficits and ultimately the Great Recession. 

Furthermore lower marginal rates will have a highly negative effect on both recovery from a recession and reducing the deficit.  Progressive tax rates are automatic economic stabilizers.  When the economy weakens taxes will fall by a greater percentage than income falls, cushioning the fall in the economy.  When the economy recovers high marginal rates will tend to increase revenue, move the nation towards a balanced budget and reduce inflationary pressures.

But as the newspaper editor in the Liberty Valence saga says, when the legend and the facts conflict, print the legend.

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