National Debt Clock

Monday, August 17, 2009

Economic Cost of High Tax Rates

Research on the major changes in tax rates over the last several decades—the lower tax rates enacted in 1981, 1986 and 2001 or the higher tax rates enacted in 1993—finds that the behavioral responses can be large. This research generally finds that for every 1 percent decrease in the after-tax reward from earning income, taxpayers reduce their reported income by about 0.4 percent.

An often underappreciated feature of our tax system is that roughly one-third of all business taxes are paid by owners of flow-through businesses—the sole proprietorships, partnerships, and S corporations that are often small in size and entrepreneurial—when they file their individual tax returns.

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