Finally, we come to income taxes and social security taxes. These have two principal problems. First, high marginal rates, significantly above 50%, have a large disincentive effect and almost certainly yield no net revenue or even reduce revenue and damage the economy in general. The 90% rates common in Britain before 1979 were thus both counterproductive in terms of revenue and hugely damaging to economic growth; they were a product of pure political spite and envy. Second, if as in the United States today, less than half the population pays effectively all the income tax, political incentives can become distorted. Hence an increase in income tax rates significantly beyond their present levels (the marginal rate of which including state taxes and social security rises above 50% at several points in the income scale) would be economically unproductive. Sadly, politics being what it is, it will almost certainly be the first resort of politicians when further borrowing becomes difficult. |
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