NCPA - National Center for Policy Analysis

THE ECONOMIC COST OF HIGH TAX RATES

August 12, 2009

President Obama appears intent on carrying out his campaign promise to raise tax rates on high-income households, but the surtax proposal that passed the Ways and Means Committee to finance health care expansion goes much further than most had anticipated. This is a policy to be wary of, says Robert Carroll, a senior fellow at the Tax Foundation.

High tax rates come with a high economic cost, they raise less revenue than the casual observer might think, and they fall heavily on the entrepreneurial sector.  Moreover, they do little to address the more fundamental explanation for the widening gap between rich and poor: the globalization of labor markets, says Carroll:

  • An often cited goal of higher tax rates is to make sure that those who have benefitted the most during the past decade pay their fair share; but even this premise for higher tax rates is flawed.
  • The globalization of labor markets over the past several decades has meant that less-skilled labor in the developing world now competes more directly with less-skilled labor in the United States.
  • This has put downward pressure on earnings growth for at least the lower half of the wage distribution in the United States.
  • Highly skilled labor and those who have made investments in advanced degrees -- what economists would call investment in human capital -- continue to earn high returns.

Moreover, high tax rates carry economic consequences.  They cause taxpayers to base decisions more on tax considerations and less on economic merit.  They also can be expected to shrink the size of the tax base and raise less revenue than the casual observer might assume.

Another important consideration is the substantial effect the higher tax rates will have on the entrepreneurial sector, whose business income tends to be subject primarily to the individual income tax, says Carroll.

Source: Robert Carroll, "The Economic Cost of High Tax Rates," Tax Foundation, Fiscal Fact, No. 182, July 29, 2009.

For text:

http://taxfoundation.org/publications/show/24935.html

 

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