The Myth of Lower Marginal Tax Rates

[Bill USA]

http://www.americanprogress.org/issues/2011/06/marginal_tax_charticle.html

Cutting taxes for the wealthy has become conservatives’ one, and often only, response to any economic problem. Just one problem: History doesn’t bear them out. Not at all.

The top marginal income tax rate has ranged all the way from 92 percent down to 28 percent over the last 60 years. With such a large range, it should be easy to see the enormous impact of lower rates on overall economic growth, as conservatives routinely claim. Years with lower marginal rates should boast higher growth, right?

That’s definitely not what happened. In fact, growth was actually fastest in years with relatively high top marginal tax rates. Back in the 1950s, when the top marginal tax rate was more than 90 percent, real annual growth averaged more than 4 percent. During the last eight years, when the top marginal rate was just 35 percent, real growth was less than half that.



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[unblock]

1. yup. they ignore that a cut in rates on gains is also an cut in the subsidy for losses

if a business proposition is profitable on a risk-adjusted basis, then it is very llikely to get done, whether its expectation is a $7mm profit or a $3mm profit.

and marginal tax rates don't change whether something's profitable or not. they only affect HOW profitable something is.

what marginal tax rates affect that DOES affect the decision is RISK. the higher the marginal tax rates, the LOWER the risk, because the smaller the difference between your net gain and your net loss.


if tax rates are near zero, the losses are nearly all yours, which might well deter you from making some decent business decisions. but if your marginal tax rate were 70%, uncle sam would be taking the lion's share of any losses, so you get give it a go without nearly as much worry about the downside.




moreover, if the business is successful, you can choose to reinvest and continue to grow, rather than take money out and get taxed at the high personal rates. again, an incentive to grow business with high marginal tax rates.



but that doesn't keep right-wingers from lying about the way things actually work. their game is to repeat whatever serves their purpose, regardless of the data.

[Bill USA]

2. a very good good point.