From my Productivity Guy:
Jonah
Good e-mail/post about taxes and productivity. I just wanted to add a couple things to flesh out Ramesh’s point about the tradeoff between deficit reduction and economic growth…I think the real negative impact of higher income tax rates would be on entrepreneurs and new business start ups. New business owners almost always report their earnings as “ordinary” income rather than capital gains. Successful new businesses would therefore get pushed into higher tax brackets, which reduces their working capital available for business expansion. Even more importantly, higher income tax rates discourage some people from starting new businesses in the first place. It’s never possible to know the counterfactual of how many new businesses would have been created if income taxes were lower, but just consider that when Ronald Reagan took office the highest marginal tax rate was 70%. Not even Paul Krugman would argue that the US would have experienced the same economic dynamism and new business formation over the last 25 years if 70% would have remained the top rate (although he’s so far gone these days who knows…).
And speaking of productivity (or the lack of it), didn’t those guys rolling the world’s biggest doobie see Cheech and Chong’s Up in Smoke? It’s been done, man.