Why Average Rates Matter More Than Marginal Rates
Garett Jones has a very interesting blog post over at EconLog (bolding mine):
When it comes to career choices or the state you'll live in or whether to have an extra child the marginal decision is very big, and a rational person will base that decision mostly on the average long run costs and benefits. In cases like this, the official marginal tax rate won't matter nearly as much as the long run average tax rate.
This isn't just a theory: It appears to be true for that most economistic of organizations, the multinational corporation...
When making the go/no-go decision, corporations care more about their long run tax bill. That's because the marginal decision is the go/no-go decision.
Bringing this to the current political discussions over taxation, Jones points out that John Boehner has fought to keep marginal taxes from going up on the rich; however, the Speaker has shown some consideration of closing loopholes, aka increasing the average rate. Jones thinks this has it backwards!
If average rates are what matter most to the economy, then it seems Boehner should rethink his position. Allowing marginal rates to go up likely won't have much negative economic effect, so long as the average rates the rich pay (including loopholes/deductions) are kept low.
P.S. Here is an academic article by David and Christina Romer that found little evidence of economic impacts from marginal tax rate changes during the 1920s and 1930s.