Yes, that’s what it says in the textbook. But the issue is more complicated than that. Look at this, for example:
What do you see? Nothing? That’s what I see, too. Of course, the topic is more complicated than a single picture. (For starters, I’d like to replace the top marginal tax rate with the marginal tax rate for people making, say, 3x the national average and see what that looks like–anyone know where I can find that data?) I’m sure that people have done sophisticated analyses of this question controlling for this, that, and the other thing, and I’m also sure you can find studies on both sides of the question.
Then there’s the idea that high taxes and the nanny state cause people to work less hard, preferring unemployment to an honest day’s work. If you believe that, I recommend this picture to you:
Again, I don’t think these pictures prove anything. Well, maybe they prove one thing: that the real world is more complicated than the first-year economics textbook. Maybe higher taxes do result in less effort and less growth when you control for everything else. On the other hand, maybe lower taxes and the resulting higher inequality result in a larger amount of what Sam Bowles calls “guard labor”–people whose job is to keep the poor part of the labor force in line, which is all basically unproductive.
If there’s one thing I’d like people to take away, it’s that any theoretical economic argument that can be stated in a sentence is as likely to be untrue as true in the real world, no matter how clever or intuitive it is.
By James Kwak