TWO REMARKABLE things stand out--for their absence--from the drawn-out, convoluted Republican tax-bill exercise. One is somewhat arcane but absolutely critical to effective tax policy (Ronald Reagan understood it); the other is astonishing, given all the GOP verbiage on the importance of investing and the alleged need for "revenue offsets" for most of their cuts.
--Marginal tax rates. This is the tax rate you pay on your next or additional dollar of income. Ronald Reagan, John Kennedy, Jack Kemp and other wise tax cutters of the past grasped the significant fact that the marginal tax rate is what matters most to individuals and businesses in their decision making on whether to work to earn more or where to invest. Take an extreme example that makes the point: Say someone makes $50,000 and is taxed at 10%; if she works harder she can boost that income to $60,000. However, if the additional $10,000 will be taxed at 98% instead of 10%, the individual will either forgo the extra income or consult a tax lawyer or accountant to find some way to shelter it. The same is true of a business. Investing is risky enough, but if any extra profit is going to be taxed at an exorbitant level, the company will probably not make the investment to expand the enterprise and will instead put the money into tax-free municipals.
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