Thursday, July 12, 2007

Why you have to keep cutting taxes 

While discussing what might happen to pay for the fiscal deficit implied by the Federal government's health care obligations, Greg Mankiw lets a really big cat out of the bag:
Depending on the path of health spending, the automatic tax increases built into current law may be enough to close much of the long-run fiscal gap. These numbers include, I believe, the automatic expiration of the 2001 and 2003 tax cuts, as well as the bracket creep that occurs as economic growth pushes people into higher tax brackets.

Of course, one should not underestimate the size of the implied tax hikes. For the median married taxpayer with two kids, the average effective tax rate (including both income and payroll taxes) rises from 20.0 to 37.6 percent. The marginal tax rate for this taxpayer rises from 30.3 to 50.3 percent.
What happens to the incentive to save and invest and work if the next dollar of what the median married worker earns is taxed over 50%?

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