Back to top

Knowledge Base

Tax Flight: Behavioral Responses to State Income Taxation

Why are low tax rates important to economic growth?

Marginal tax rates—how much someone is taxed on the next dollar they earn—are extremely important to economic growth. They affect how much we work, save, and spend, whether we start businesses, and how we run them. Higher marginal tax rates make it less profitable to work, hire, or invest more, leading to slower economic growth. Lower marginal tax rates allow you to keep most of what you earn, thereby making it more profitable to work, hire, and invest. Ultimately, lower marginal tax rates lead to more rapid economic growth. 

Furthermore, as tax rates go up, taxpayers have more of a reason to avoid paying those taxes. Loopholes go hand in hand with higher tax rates, which is why lower rates on a broader base of income leads to a more equitable system. Learn more about the importance of tax rates in these PolicyEd videos: