Madrick On Income Tax Rates Vs Growth Rates
Q: Jeff Madrick's column in today's NYT addresses the issue of the effect of income tax rates on economic growth. He cites studies that he claims shows there's no clear effect.
A: -Depends if the tax falls primarily on earned or unearned income. England grew rapidly under its income tax of the early 19th C. because the burden fell almost entirely on unearned income, especially land rents (indeed, the word "income" then meant what we now call "unearned income," especially land rents: earned income was referred to as "wages"). -Madrick's claims that the studies he's describing says it doesn't hurt if it's on earned income. (Though perhaps he's speaking more of the upper end of the income distribution.) -The popular image of the American entrepreneur as a glamorous and roguish risk-taker was tarnished by a recent study that suggests that taxes and business-cycle factors play a key role in generating entrepreneurial activity in the United States. "Taxes aren't the only thing that matters, but tax effects can be very large," according to Roger Gordon, coauthor of the study and a professor of economics at the University of California at San Diego. Gordon discussed his findings September 17 in Washington at a seminar sponsored by the American Enterprise Institute. In the study Gordon and coauthor Julie Berry Cullen, with the University of Michigan, focus on how taxes -- in particular, personal income, payroll, and corporate taxes -- affect rates of entrepreneurship. The authors narrowed their focus to an examination of risky projects undertaken in start-up firms. Their findings were culled from examining 2 million tax returns