Understanding the Business Ecosystem in the USA and Canada

Several further research corroborate the conclusion that high and rising marginal taxes harm economic growth. Reinhard Koester and Roger Kormendi (1989) conducted a research in the 1970s using data from 63 nations. They discovered that reducing the tax system's progressivity while keeping the same tax revenue as a proportion of GDP resulted in higher levels of national income. In a similar spirit, Professors John Mullen and Martin Williams (1994) examined the effects of state and local tax systems on state economic performance using US state data from 1969 to 1986. The authors concluded that lower marginal tax rates can greatly improve economic growth. They also underlined the significance of creating a less oppressive tax structure while maintaining the same average tax rate.

Most tax studies focus primarily on marginal tax rates. 

A marginal tax rate (MTR) is the tax rate that is applied to each additional dollar of income produced. MTRs have a major impact on the amount of income left after taxes, which influences economic behavior. Simply put, when deciding whether to work longer hours, pursue education, save, or invest, the MTR is the most important tax rate for individuals and corporations. When the MTR is high, individuals, families, and businesses are discouraged from engaging in productive activities such as working, saving, investing, and entrepreneurship. This is because the return on these activities decreases, limiting motivation to participate.

The GDP is the total worth of all products and services generated in a specific region during a specified time period. This chapter focuses on the impact of marginal tax rates on economic behavior. When analyzing taxes, the average tax rate (ATR) must also be taken into account. The ATR is the total amount of taxes paid relative to total taxable income over a certain time period. It gives information about the average tax burden faced by individuals, households, and businesses. The ATR, like the MTR, has the ability to influence economic well-being. As an example, as the size of the government grows (meaning that it spends more than the broader economy), individuals face higher average tax burdens, which can lead to poor economic performance.

Taxes and Economic Growth

Economic growth is a standard metric for assessing an economy's overall health. The annual percentage change in a country's gross is used to calculate it. Taxes have a significant impact on the total growth rate of the economy since they directly affect the returns from working, saving, investing, and entrepreneurship. This, in turn, impacts the country's GDP. This is especially true with higher marginal rates. Section 2 summarizes recent studies on taxes and economic growth. It discusses a variety of topics, including tax rates, tax structure, and progressivity. Both of these tax systems are classified as "progressive tax systems," which means that they take a bigger percentage of revenue from higher-income individuals than from those with lower incomes. A progressive tax system accomplishes vertical fairness in one of two ways. Vertical equity is an income tax collecting mechanism that ensures taxes are paid in proportion to income produced. To achieve fair taxation, most countries use progressive tax systems. Implementing a proportional tax system, in which the amount of taxes paid rises in proportion to income, is another strategy to achieve vertical fairness. For example, a 10% increase in revenue would translate into a 10% increase in taxes paid. The flat tax has the ability to mitigate the disadvantages of high and growing marginal tax rates while remaining progressive. Implementing a low-income exemption can help to promote progressivity within a system based on a flat or single-rate tax. Individuals, families, and businesses earn more, therefore they pay more in taxes, but they are no longer subject to rising marginal tax rates. As a result, the flat tax system promotes progressivity while avoiding the negative repercussions of high and rising marginal tax rates.

Tax Rates

There is a large body of scholarly evidence to support the claim that high marginal tax rates have a detrimental influence on economic growth. Two studies undertaken by European scholars Fabio Padovano and Emma Galli (2001; 2002) demonstrate the negative impact of high marginal tax rates on economic growth. Padovano and Galli (2001) observed that between 1951 and 1990, high marginal tax rates and progressivity had a negative connection with long-term economic growth in 23 OECD nations. In a follow-up study done in 2002, they discovered that a modest 10% increase in marginal tax rates resulted in a 0.23 percentage point loss in yearly economic growth. A progressive tax structure is one in which income tax rates rise as an individual's income rises. Mullen and Williams (1994) argue that taxation can enable sub-national governments to foster economic growth. Another study, undertaken by Eric Engen and Jonathan Skinner (1996), reviewed over 20 studies on the relationship between tax rates and economic growth, both in the United States and elsewhere. According to their analysis of these studies, a large tax reform that would cut both marginal rates by 5 percentage points and average tax rates by 2.5 percentage points is expected to have a beneficial influence on long-term growth rates 0.2 to 0.3 percentage points" (Engen and Skinner 1996: 34).4 Francesco Daveri and Guido Tabellini (2000) proposed that the slow.