There has been much recent discussion that it is time to raise that rate, at least temporarily, to help deal with the terrifying deficit.  One of the most compelling arguments is that we should think longer-term.  After all, the highest rate was 91% in 1955 and is much lower today.  Also, the highest 11% paid 100% of the income taxes in 1940, while the highest 10% pay “only” 70% now.  There has been substantial progress made already.

I’m not arguing that taxes should not rise, but I am arguing that the economic consequence of tax changes should be considered.  According to Supply-side economics, any increase in the highest marginal tax rate creates a significant loss in motivation by the most talented of our citizens.  I do think there is truth to this argument, but the significant loss in motivation is not immediate.  Theoretically, the economy would be improved by the time they act on that loss in motivation.  (It might also induce some high-income workers to retire early, but that opens the door for the frustrated younger workers, who are tired of us gray-haired baby boomers anyway.)

In addition, it is argued that raising the highest marginal income tax rates would decrease the flow of capital into productive purposes, while increasing the flow into government purposes.  Doesn’t that assume high income workers are putting money into productive purposes now?  Instead, we see retail investors sitting on too much cash, avoiding the stock market.  With some exceptions, cash sitting idly in bank accounts is not being put to productive use, especially since banks are making relatively few loans, compared to their normal lending practices.

At year-end, the “Bush tax cuts” will expire, and the highest marginal tax rates will return to the Clinton-era levels.  That will be good for the budget deficit and bad for the economy in the short-run but good for our credit rating in the long-run.

Maybe, if the highest marginal tax rate for my Federal taxes goes back up, I’ll spend more time watching geese soil a perfect putting surface and less time pondering tax policy . . . but, I doubt it!