Average Tax Rates Matter Most For Some Decisions

What is 'marginal' is what is avoidable when you make a decision.  If you decide to work one more hour this year, then the marginal tax rate is what is avoidable.  If you decide what career for the next year, your future average tax rate is what is avoidable.  Garett Jones:

It's often wise to pay more attention to marginal tax rates than to average tax rates.  If you can make your first $100 tax free but the 101st dollar is taxed at a marginal rate of 99% you'll probably decide to earn $100 at most.  

But what is marginal?  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 multinationals are deciding which country to invest in, they don't pay that much attention to marginal tax rates.  According to Glenn Hubbard, 

...investment location decisions are more closely related to average rather than marginal tax rates. 

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.  

...when people are deciding whether to become medical doctors or mere professors, lawyers or struggling novelists, entrepreneurs or Xbox champions, these go/no-go decisions will be shaped by the average tax rate that the rich will have to pay for decades to come. 

...That's just a case of applying Hubbard's idea: the marginal tax rate didn't matter when you chose your career, but the average tax rate--after deductions--mattered enormously.  

In the long run we should worry more about average tax rates.