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January 30, 2006

Do higher tax rates dampen economic growth?

There’s an ongoing debate about whether tax rate increases slow economic growth. Dr. Mike Walden comments on state-level implications.

"Studies do find that higher what’s called marginal tax rates will deter some economic growth," says Walden, a professor and extension economist at N.C. State University.

"Now what is a marginal tax rate? Well, it’s the tax rate that a person would pay on additional income that they may earn," he explains. "Let me give you an example: Maybe you would pay 5 percent in terms of a state income tax on the first $50,000 of income you earn, but any income above that let’s say you pay 7 percent. What that means is that the marginal tax rate has gone up for higher levels of income.

"And that’s what this study finds: It finds that that kind of change where you pay a lower rate on initial income [and] a higher rate on later income may actually deter people from earning that additional income and may actually dampen economic growth in states."

Posted by deeshore at January 30, 2006 08:00 AM