How will the increase in the MTR affect the economy?

How will the increase in the MTR affect the economy?

Introduction

Marginal tax rates (MRT) are considered important variable from an economic perspective. There is a strong correlation between marginal tax rates and economic performance of the country. This indicates the effect of MRT on the incentives of the individuals to earn a bracket of additional income. The rise in the additional income creates a negative effect on individuals to keep lesser of their additional earnings. This essay imparts relationship between marginal tax rates (MRT) and economic performance of the country. This writing also illustrates the nature of politics and economics to understand the impact of MRT on the consumptions and earnings of individuals. Tax structures are the legitimate business expense. The paper concludes with the discussion on the commonalties between findings from relevant literature and learning outcomes of this subject for coursework of economics.

Discussion

What is MTR?

Marginal tax rate (MRT) is the proportion that defines the tax amount to be paid on every additional dollar of income received. The MRT for an individual tends to increase with the rise in the income. This is considered as fair method of taxation to tax individuals on the basis of their earnings. The classification of tax payers into ranges or brackets will determine the tax rate of the taxable income. This method of taxation is favorable for few economic proponents as they consider it as highly equitable taxation method (Doucouliagos, et al., 2010). While, other school of thought believe that this taxation method discourages the business investment as it refrain the incentives to work harder and depict productivity.

Factors for Impact Measurement

The increase in the revenues and slowdown growth effect of income inequality are immediate consequences of raising marginal income tax rates. This assumption is according to the current briefing paper of Century Foundation Fellow and EPI Federal Budget Policy Analyst Andrew Fieldhouse. He also added that this trend will make little or no effect on the growth of economy (Arnold, 2011). He counterfeit his statement with the discussion that diminution is U.S tax rates have shown no statistical impact on the overall economic growth of the country, but there is a noteworthy increase in income inequality. There are multitude factors and consequences that embark the strong relationship between economic growth and marginal tax rate. Following are three major factors that indicate the influence of high marginal tax rates on the economic performance.

Factor One: Discourage Work Effort

The first factor relates to the discouragement of work effort due to high marginal tax rates. As discussed in the former sections, taxes decline the bracket of additional earnings that an individual is consented to keep, they tend to work and earn less of this earning. This will cause change in the trends of consumption and expenditure patterns of individuals (Hungerford, 2012). They will be intending to adjust in different ways.

Individuals with working spouse may decide to drop out or lay off from the ...