The effect of marginal tax rates

17/12/2012

It has sometimes been suggested that marginal tax rates in Ireland are too high, and that raising them would harm growth. They may affect the incentive to work. It is true that they are 10th highest, of the 34 countries in the OECD. Also the marginal rate hits in relatively low (affecting average earners). Helpfully, the OECD provide the data here.


However, what is the link between marginal tax rates and the economy?
As can be seen in the above graph there is no negative relationship between GDP per capita and marginal tax rates. In fact it is slightly positive. Of course this is not conclusive evidence of a positive link, but the evidence certainly does not support the hypothesis that high marginal rates harms GDP.

But does it affect the incentive to work?

No relationship is found between unemployment rates and marginal tax rates in the OECD.

High tax rates are not the problem. In other countries, such as the Nordic countries, high tax rates are used to fund social services such as child care, which make it easier for people to work in the market economy.

Posted in: Taxation

Tagged with: tax rates

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