Incentives to Produce. The highest marginal tax rate on individual incomes is a very rough measure of marginal tax rates for the entire tax system. Moreover, the highest tax on individuals invariably sets a similar limit on the corporate tax rate. Under any coherent economic theory, higher marginal tax rates on productive effort and capital accumulation ought to result in less of such activity. If people do not respond to tax incentives, then they do not respond to price incentives either, which would leave economics adrift with nothing to say about anything.
Taxes are an important part of the cost of production as well as the cost of living.
If the marginal cost of taxes does not matter, then neither does the cost of labor, oil, credit or anything else. Argentina, Bolivia, El Salvador and Peru are good examples. Stopping Economic Decline. These included South Korea in 1980, Mauritius in 1982, Singapore in 1985 and the four Latin American countries previously mentioned. Aside from the recent debacle in Asia, most of these countries have done remarkably well ever since their tax rates came down.