With huge deficits, ballooning debts, an ageing population, and out-of-control entitlement programs, do you have any doubt about which way tax rates are headed?
Good. Neither do we.
But in case you’re not absolutely certain, courtesy of Paul Kasriel at Northern Trust, here’s a snapshot of where taxes (federal income tax, top bracket) have been for the past 30 years.
Two quick points:
- A modest hike would put us at about average levels. So don’t go crying about how it’s some crazy new era in which we’re being taxed to death.
- A return to the 70s would result in tax hikes for the next generation and lead to a near-doubling of the marginal rate. THAT would be something to scream about.
One of Paul Kasriel’s points, by the way, is that increasing taxes does tend to act as a brake on economic activity, but not as much as you think. Other things matter, too:
With regard to tax rates, yes, the top marginal tax rate was coming down – coming down from 70% (see Chart 6). And yes, the top marginal tax rate is likely to rise in 2011, but not from 70% but from 35%. All else the same, an increase in marginal income tax rates does have negative consequences for economic performance. But all else seldom is the same. The economy performed pretty well in the eight years ended 2000 even though the top marginal tax rate was higher in these eight years than it was in the prior eight years. The economy did not perform better because of the increase in the top marginal tax rate. Nevertheless, this increase was not sufficient to derail economic progress. In the eight years ended 2008, the economy performed relatively poorly despite the lower top marginal tax rate. The economy did not under-perform because of the marginal tax rate cut. Nevertheless, the cut in the tax rate was not sufficient to enhance economic performance. The point of all this is that although tax rates matter, they are not all that matters.
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