Why Tax Rates Matter More Than Taxes
Marginal tax rates – how much someone is taxed on the next dollar they earn – affect how much people work, save, and invest. Everyone is affected by their marginal tax rate, and lower marginal tax rates lead to more rapid economic growth.
- How do marginal tax rates affect families at various levels of poverty?
- Are there any benefits to high marginal tax rates?
- Are there any negative consequences of low marginal tax rates?
- Read John Cochrane’s blog post, “Economists and Taxes.”
- Listen as John Cochrane discusses his blog post "Economists and Taxes," available here.
- Read “We Need Corporate Tax Reform” by Richard Epstein.
- Listen as Richard Epstein discusses his Defining Ideas article "We Need Corporate Tax Reform," available here.
Debates about tax reform often focus on who will pay more and who will pay less.
These distributional questions obscure a crucial issue: How do changes to the tax code impact the economy?
Tax rates change behavior.
They affect how much we work, save, and spend, whether we start businesses, and how we run them.
And it’s the marginal tax rate – how much you’re taxed on the next dollar you earn – that guides these decisions.
If you can choose whether to work overtime or not, your decision doesn’t depend on how much in taxes you’ve already paid...it will depend on how much you’re taxed on those additional earnings.
You’re more likely to work an hour of overtime if your marginal ta rate is low and you’re able to keep most of what you earn, than if you have a high marginal rate and more of your money is paid in taxes.
Since higher marginal tax rates ultimately make it less profitable to work, hire, or invest more, they lead to slower economic growth.
Over the years, investments not made, schooling not pursued, or businesses not started all cumulatively add up to a lower quality of life for everyone.