TY  - JOUR
AU  - Feldstein,Martin
TI  - The Effect of Taxes on Efficiency and Growth
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12201
PY  - 2006
Y2  - May 2006
UR  - http://www.nber.org/papers/w12201
L1  - http://www.nber.org/papers/w12201.pdf
N1  - Author contact info:
Martin S. Feldstein
President Emeritus
NBER
1050 Massachusetts Avenue
Cambridge, MA  02138-5398
Tel: 617/868-3905
Fax: 617/868-7194
E-Mail: msfeldst@nber.org
M2  - featured in NBER digest on 2006-05-15
AB  - This nontechnical paper discusses the adverse effects of high marginal tax rates on labor income and on investment income.  It explains that the deadweight loss of a tax on labor income depends on the response of taxable income and not just the change in labor supply.  An across the board increase in personal tax rates involves a deadweight loss of 76 cents per dollar of revenue and only collects about two-thirds of the revenue implied by a %u201Cstatic%u201D calculation.
A tax on investment income brings a deadweight loss even if household saving does not respond to taxes and the net rate of return.  What matters is the response of future consumption. The tax on investment income is also effectively a tax on labor supply because current work effort produces income that will be spent on future consumption and the tax on investment income reduces the future consumption that results from more work today.  
An appendix shows for a simple log utility case that the tax on labor income has a smaller deadweight loss than a tax on investment income with the same present value of revenue.
There is a further discussion of the various ways in which capital income taxes distort economic activity. 
ER  -