President Obama has once again put the question of income tax
rates on center stage. As a Wall Street Journal headline
put it, "Obama Intensifies Tax Fight." He is apparently hell-bent
on making our income tax structure more progressive.
Raising tax rates on upper-income earners is an appealing idea to many people. The President certainly hopes that it is. The most common argument against the idea is that it would diminish the incentive for business owners to invest, hire, and grow their businesses. Although that is all too true, it's only one kind of damage done by high marginal tax rates. Even if we were not in a recession, more tax progressivity would still be a bad idea.
It's well known that taxes reduce economic effort. If you want less of something, tax it. That, by itself, reduces wealth creation and economic growth. Less well recognized, however, is that high tax rates misdirect and misallocate economic activity.
A flatter, less progressive income tax rate schedule is an idea that never seems to go away. Perhaps the earliest argument for a flat tax was in Milton Friedman's 1962 classic, Capitalism and Freedom. Its latest sighting is in what's called the "Ryan Budget" authored by Congressman Paul Ryan. The official name for his budget plan is "The Path to Prosperity: Restoring America's Promise." His proposal advocates only two federal personal income tax rates -- 10 and 25 percent. A notable and similar recommendation was part of President Obama's own deficit reduction team of Erskine Bowles and former senator Alan Simpson. Their "National Commission on Fiscal Responsibility and Reform" recommended federal rates of 8, 14, and 23 percent. Obama totally ignored the Bowles-Simpson recommendations.
Read more: http://spectator.org/archives/2012/07/13/the-real-damage-done-by-high-t
Raising tax rates on upper-income earners is an appealing idea to many people. The President certainly hopes that it is. The most common argument against the idea is that it would diminish the incentive for business owners to invest, hire, and grow their businesses. Although that is all too true, it's only one kind of damage done by high marginal tax rates. Even if we were not in a recession, more tax progressivity would still be a bad idea.
It's well known that taxes reduce economic effort. If you want less of something, tax it. That, by itself, reduces wealth creation and economic growth. Less well recognized, however, is that high tax rates misdirect and misallocate economic activity.
A flatter, less progressive income tax rate schedule is an idea that never seems to go away. Perhaps the earliest argument for a flat tax was in Milton Friedman's 1962 classic, Capitalism and Freedom. Its latest sighting is in what's called the "Ryan Budget" authored by Congressman Paul Ryan. The official name for his budget plan is "The Path to Prosperity: Restoring America's Promise." His proposal advocates only two federal personal income tax rates -- 10 and 25 percent. A notable and similar recommendation was part of President Obama's own deficit reduction team of Erskine Bowles and former senator Alan Simpson. Their "National Commission on Fiscal Responsibility and Reform" recommended federal rates of 8, 14, and 23 percent. Obama totally ignored the Bowles-Simpson recommendations.
Read more: http://spectator.org/archives/2012/07/13/the-real-damage-done-by-high-t
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