Friday, August 13, 2010

What should the tax rate be?

Interesting question posed by Dylan Matthews on Ezra Klein's blog: "What is the revenue maximizing marginal tax rate?"

Obviously a rate of 0% raises $0, and a rate of 100% would provide no incentive for work, so we know what the two ends of the Laffer Curve look like. The real question is what shape is the curve in between? The answers above vary a great deal.....roughly 60-70% for economists who focus on this from a research standpoint, lower say 40-50% for more conservative economists, and much lower for conservative pundits.

The most interesting response to me was Martin Feldstein's who basically says this is the wrong question and gives the logic for running a small deficit all the time in order to increase consumption....of course now we don't have a small deficit...but he says he wouldn't only look for the revenue maximizing point, but would also not want to give us $1 Billion in national consumption for a $100 Million reduction in the deficit.

More on where the curve bends....

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