Home > Economics > I had never thought about it that way before

I had never thought about it that way before

November 30, 2011 Leave a comment Go to comments
…we think about taxes the wrong way around.  Most people think that raising a 5% tax rate to 10% is more noticeable (and painful) than raising a 50% tax rate to 55%. After all, the first represents a doubling of your tax rate; the second is only a 10% increase. But this is exactly the wrong way to think about it. The pain of a tax hike is determined not by how your current tax rate compares to your earlier tax rate, but by how your current disposable income compares to your earlier disposable income. Doubling the tax rate from 5% to 10% decreases your disposable income by about 5.25%.  But raising it from 50% to 55% decreases your disposable income by 10%.  That’s a much bigger whack.
That’s from the ever-increasingly indispensable Megan McArdle, who is worrying about the relative capacity of us big-government Europeans to bailout the financial system today, compared to us slightly-less-big-government Americans (the joys of dual-nationality) in 2008. Add a heroically incompetent central bank operating under impossible public choice conditions into the mix, and frankly it’s pretty difficult to see how we’re not all royally screwed.
Categories: Economics

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: