A new paper by Karel Mertens examines the effects of high marginal income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates on the top 1 percent and its effects on income and the economy.
From the abstract:
“A hypothetical tax reform cutting marginal rates only for the top 1% leads to sizeable increases in top 1%’s incomes and has a positive effect on real GDP. There are also spillover effects to incomes outside of the top 1%, but top marginal rate cuts lead to greater inequality in pre-tax incomes.”
This paper reminds us of three important things about taxes.
First, taxes affect behavior. When there is a tax penalty on earning income, people will earn less income. This paper finds that lowering the tax burden on a specific income group, affects their behavior; they earn more money.
Second, taxes do effect economic growth. This paper is another addition to the collection of work that shows that high tax rates adversely affect the economy. If we want to have higher economic growth in the long term, lower tax burdens are a must
Third, there appears to be a tradeoff between income equality and economic growth. Yes, high marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s reduce income inequality, but at the price of lower economic growth and wages for all.
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