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November 27, 2008

The marginal tax rate debate

Taxes were a hotly debated issue during the presidential campaign. A big part of the debate was about tax rates paid by persons with different incomes. What were the issues?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"This was centered primarily on the federal income tax and the tax brackets in that federal income tax. Those tax brackets are also known as marginal tax rates. And here's the deal, the federal income tax is progressive, meaning that the higher your income, the higher the tax rate that you pay. But the question is always, Well, how progressive should it be? Right now, the top tax rate is somewhere between two and three times higher than the lowest tax rate. And one of the debates is, Well, should it be more than that? Should it be less than that? Another debate has to do with what will be the reaction of people in those top tax brackets if their tax rate is actually increased. There's some evidence that suggests that when people pay a higher tax rate, it actually discourages them from working more and investing more, and that revenue from them could actually go down or perhaps grow at a slower rate than anticipated. So you could argue that very, very high tax rates could be counterproductive for the economy. So these are the debates about tax rates, and I think we will probably see these debated even further with the new administration economists."

Posted by Dave at November 27, 2008 08:00 AM