MICHAEL J. BOSKIN
Wall Street Journal
July 18, 2011
President Obama has been using the debt-ceiling debate and bipartisan calls for deficit reduction to demand higher taxes. With unemployment stuck at 9.2% and a vigorous economic “recovery” appearing more and more elusive, his timing couldn’t be worse.
- A d v e r t i s e m e n t
Two problems arise when marginal tax rates are raised. First, as college students learn in Econ 101, higher marginal rates cause real economic harm. The combined marginal rate from all taxes is a vital metric, since it heavily influences incentives in the economyâ€”workers and employers, savers and investors base decisions on after-tax returns. Thus tax rates need to be kept as low as possible, on the broadest possible base, consistent with financing necessary government spending.
Second, as tax rates rise, the tax base shrinks and ultimately, as Art Laffer has long argued, tax rates can become so prohibitive that raising them further reduces revenueâ€”not to mention damaging the economy. That is where U.S. tax rates are headed if we do not control spending soon.
The current top federal rate of 35% is scheduled to rise to 39.6% in 2013 (plus one-to-two points from the phase-out of itemized deductions for singles making above $200,000 and couples earning above $250,000). The payroll tax is 12.4% for Social Security (capped at $106,000), and 2.9% for Medicare (no income cap). While the payroll tax is theoretically split between employers and employees, the employers’ share is ultimately shifted to workers in the form of lower wages.