The dynamic marginal tax rate

There is a general misconception on the impact of marginal tax rates. Following the hypothesis of optimising economic agents, it is proper that marginal rates enter the discussion. The only issue is that the margin mu= st be computed correctly. In dynamics, one must take account of the fact tha= t tax parameters may change, or for optimality should change. The change of tax parameters affects the value of the proper marginal rate. The proper dynamic marginal rate can be called the =91dynamic marginal rate=92. The revolution in dynamics as exemplified by Keynes (1936) may find another twist in this issue. This new analysis dramatically affects macro-economi= cs and common perceptions in policy making. It is commonly thought that stagflation has been caused by external factors such as technology or the competition of low wage countries. The current analysis points to the conclusion that stagflation has been caused by internal factors, notably government policy itself, which policy has been based on a wrong percepti= on of the marginal tax rate.