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Tax rates can go up without the government bringing in more revenue. How? Because people make choices about how many hours to work or how much savings to invest based on their return on that extra hour worked or the extra dollar saved. Say, for instance, a cab driver gets taxed at a higher rate for driving 60 hours a week than he does for driving 40 hours a week. When he realizes that his effective income per hour goes down, not up, for working overtime, he might choose to stick to driving only 40 hours, and spend the additional time with his kids. Trade-offs like these demonstrate how higher tax rates not only fail to raise revenue for the government, but actually harm the economy, since the cabbie would otherwise be willing to drive the extra hours and passengers would otherwise have the benefit of those cab rides. These economic “disincentives” are very powerful in the death tax. To understand the incredible disincentive effect of the death tax, consider that income tax rate increases – the kind the cabbie was facing – would have to go up roughly 70 percent, or nearly twice the current top marginal income tax rate of 39.6 percent, to equal the disincentive effects of the death tax. |
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