Posted on 10/15/2012 1:20:48 PM PDT by Joachim
How Lower Top Marginal Rates Let The Economy Grow (or “The Monkey In Your Pocket”)
Taxes are like a monkey in your pocket. Whenever you get paid, the monkey immediately grabs a cut. Whatever amount you think you need—whether just to meet obligations, or to reach your dreams—you have to earn more to feed the monkey first. And the monkey keeps tabs on your total for the year, grabbing a bigger piece as the total goes up. If you make enough, the monkey transmogrifies into a gorilla on your back, grabbing half of every dollar for federal taxes alone.*
Why does this matter? Well, say you have a service business. Anytime I pay you for your service, I have to pay enough to feed your monkey too. The more your monkey eats, the less money you get for your service and the less service I get for my money. If the monkey takes a big enough bite, you will just quit the business, or I will just do without your service, or do it myself—not because I would not have benefitted from your service, and you from my money, but because there is just not enough leftover value in our exchange to pay the monkey. Some businesses may be viable if they stay small and avoid the top rates, but their growth is capped.
Multiply this effect throughout the economy. If your business becomes unsustainable, so do others that depend on you as a customer. As the share the monkey takes increases, there is a snow-ball effect—previously viable businesses opportunities die, commercial exchange and cooperation decrease, and everyone is poorer as we all do more for ourselves, or do without.
Conversely, lowering top marginal rates shrinks the maximum share taken by the monkey—the share that determines whetheror not a business can survive and grow—so more business opportunities become viable, commercial exchange and cooperation increase, and everyone is richer as we all benefit more from each other’s skills, talents, and education. This effect helps explain why the fraction of GDP taken in taxes stays about the same, regardless of the top rates. The real way to grow tax revenue and enable government to meet its obligations is to grow GDP—by lowering top marginal rates, getting the gorilla off our backs.
*Assumes federal top marginal rates and includes the self-employment tax (or employer-paid payroll taxes attributed to employees).
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