More Evidence on High Tax Rates

July 3, 2013

A new paper by Karel Mertens examines the effects of high marginal income tax 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 rates reduce income inequality, but at the price of lower economic growth and wages for all.

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