I submitted this letter to the WSJ last week, but assume they didn't run it. For what it's worth:

Dear Editor:

Rudolph Penner of the Urban Institute says ("As Bigger Piece of Economic Pie Shifts to Wealthiest, U.S. Deficit Heads Downward", 7/17/06, A2) the Bush tax cuts "should have led to more income than expected for all wage earners, not just those at the top, since the majority of wage earners got a tax cut." Mr. Penner fails to realize that across-the-board cuts in marginal tax rates will have different incentive effects up and down the income distribution. Suppose that a government with progressive income tax rates ranging from a low of 15 percent to a high of 75 percent reduced tax rates across the board by one-third. The top tax rate would then fall from 75 to 50 percent. After the tax cut, taxpayers in the highest tax bracket who earn an additional $100 would get to keep $50 rather than only $25, a 100 percent increase in their after-tax wage. Predictably, these taxpayers will have a strong incentive to earn more taxable income after the rate reduction. Meanwhile, the same rate reduction will cut the bottom tax rate only from 15 to 10 percent. In this range, the tax cut means that an additional $100 in gross pay increases take-home pay to $90 from $85, just a 5.9 percent increase. Because cutting the tax rate exerts only a small effect on the after-tax wage among lower income taxpayers, the incentive to earn additional income will be largely unchanged. The bottom line is that when all rates are cut by approximately the same percentage as was the case with the Bush tax cuts, the increase in the incentive to earn will be greatest in the upper income tax brackets.

Regards,

Robert A. Lawson
Social Philosophy and Policy Center, Bowling Green State University
School of Management, Capital University