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Can America Remain Great? Implications of Alternative Fiscal Futures with Michael Boskin

Terms You May Have Heard

Corporate Tax: The corporate tax is a levy placed on the profit of a firm to raise revenue. Rules surrounding corporate taxation vary greatly around the world. The United States has the highest corporate tax rate among member countries in the Organization for Economic Co-operation and Development (OECD).

Marginal Taxes: A marginal tax rate is the amount of tax paid on an additional dollar of income. The marginal tax rate for an individual affects his or her decision to work, invest, or save more than they currently do. If an individual has a high marginal tax rate, the cost of working to earn an additional dollar is higher than for an individual with a low marginal tax rate. 

Tax Expenditures: Tax expenditures provide politically favored organizations, industries, or individuals exemptions or deductions from gross income in order to encourage and support specific activities. The tax exemption on employer-provided health insurance is one of the largest tax expenditures, leaving hundreds of billions of dollars of tax revenue uncollected in order to promote the purchase of health insurance by workers in the economy.

Gross Domestic Product (GDP): GDP is a market value of all final goods and services newly produced in a country during a period of time. Market value means the total amount that people spend or produce measured by the market prices.

Net exports: Net exports are the difference in monetary value between a nation’s exports and imports. When exports are larger than imports, net exports are positive. When a country imports more than it exports, like the United States currently does, then net exports is negative.

Nuclear energy: Nuclear energy comes from splitting atoms in a reactor to heat water into steam, turn a turbine, and then generate electricity. Nuclear power produces reliable electricity, protects the environment, and boosts international development. 

Renewable energy: Renewable energy is extracted from natural resources that will replenish in a human timescale. In other words, these resources are a part of our planet’s ecosystem and will not run out. The main renewable energy sources are solar, air, wind, biomass, hydropower, geothermal, and biofuels.

How are marginal tax rates and average tax rates different?

Your average tax rate is equal to all of the taxes you pay divided by your total income. Your marginal tax rate measures only the tax you’ll pay on your future income. 

When it comes to federal taxes, most people’s average tax rates are lower than their marginal tax rate. That’s because the tax code is progressive, and marginal tax rates get larger as a person’s income increases. 

But it is possible to have a high average tax rate but a low marginal tax rate. For example, let’s say the first $10,000 of your earnings are taxed at 50 percent, and then every dollar after that is taxed at 10 percent. If you earn $11,000, your average tax rate will be higher than your marginal rate of 10 percent, because you’ll have paid 50 percent on $10,000 and then 10 percent on the next $1,000.

Why are people likely to work more under a lower than a higher marginal tax rate?

In economics it is commonly understood that everyone faces a choice between work and leisure. When working isn’t worth it, we turn to leisure. When leisure gets too expensive, we turn to work.

Lower marginal tax rates make the income derived from work relatively less expensive, which means people will defer a little more leisure than if marginal rates were higher. And “work” can mean more than just work. It represents saving, investment, hiring, and all sorts of economic activities.   

How do increases in productivity and total hours worked interact to inform economic growth?

In order to determine economic growth, the size of the economy must be compared to that of a previous time period. Increases in productivity alone are not enough to tell us if the economy has grown. If the people working get twice as productive, but total work falls in half, then there will have been zero growth. In the same way, adding more people to the economy at the expense of productivity could also lead to mixed results for economic growth.