Over the past century, the pattern regarding changes in personal income tax rates has been pretty reliable. When tax rates are substantively reduced, the economy benefits. When tax rates are hiked, the economy suffers.

We saw this play out again when personal income tax rates were cut in 2003, and the economy responded positively. Now, we have to worry about the fact that this tax relief faces elimination in a few years. That is, we face tax increases in 2011.

The history really is quite compelling. Since 1921, there have been four periods of notable reductions in the personal income tax. In each case, the economy reacted positively.

In 1921, the top tax rate stood at 73%. From 1922 to 1929, Presidents Warren G. Harding and Calvin Coolidge pushed to reduce the personal income tax across the board, with the top rate eventually falling to 24%. During that period, the economy experienced robust economic growth, with real annual GNP growth averaging 6.2%.

In 1963, the highest personal income tax rate was a staggering 91%. President John F. Kennedy proposed a personal income tax cut, which was implemented after his death. The top rate declined to 77% in 1964 and then to 70% for 1965 through 1967 (the rate was increased in 1968). From 1964 to 1967, real GDP growth averaged an impressive 5.3%.

In 1980, the top tax rate was 70%. Under President Ronald Reagan's tax cuts, it subsequently was reduced to 50% as of 1983, and then dropped to 38.5% in 1987 and 28% in 1988. During the time the Reagan tax cut was fully in effect, from 1983 to 1989, real GDP growth averaged 4.3% per year - well above the post-World War II average of 3.5%.

Most recently, President George W. Bush led the charge for personal income tax reductions. The first cut was passed in 2001, but was to be phased in over several years. In 2003, the rate reductions were fully accelerated, with the top rate declining from 39.6% in 2000 to 35%. The economy had been struggling for a variety of reasons since the middle of 2000, with a recession in 2001 and a subsequent sluggish recovery. But with the passage of the tax cut in mid-2003, economic growth picked up markedly. Real quarterly GDP growth averaged a solid 4.3% from the third quarter of 2003 through the first quarter of 2005. For all of 2004, real GDP growth registered 4.4%.

In contrast, there certainly have been cases where increases in the personal income tax took a toll on the economy.

Prior to 1913, for example, the U.S. did not impose a personal income tax. After it was instituted in 1913, the economy took a major hit - with real GNP growing at a mere 0.9% in 1913, and then actually falling, by -4.4% in 1914 and -0.9%% in 1915. A major increase in tax rates was imposed in 1917 - with the top rate jumping from 15% to 67% -- and the economy grew at a woeful 0.7% that year.

A dramatic hike in tax rates - with the top bracket leaping from 25% to 63% -- was inflicted in 1932. This played a role in deepening the Great Depression. The change in real GDP registered -13% in 1932 and -1.3% in 1933.

For good measure, the income tax increases passed in 1990 and 1993 hurt the economy, playing parts in the 1990-91 recession, and in the sluggish economic recovery experienced for the following nearly six years. From 1991 to 1996, real GDP growth averaged only 2.7% -- well below the 3.5% post-World War II average.

So why do changes in tax rates matter? In particular, marginal tax rates - i.e., the tax rate on the next dollar of income earned - influence economic decisions. For example, the marginal tax rate helps determine the relative price of work vs. leisure, investment vs. consumption, risk taking (such as entrepreneurship) vs. risk avoidance, and so on.

Changing marginal income tax rates alters incentives for working, investing and risk taking. This is important to the economy because such endeavors drive economic growth. So, lowering marginal tax rates helps the economy by enhancing these pro-growth incentives. In contrast, an increase in the marginal tax rate hurts or restrains the economy by diminishing those incentives.

It's also crucial to understand that personal income taxes directly impact the bottom line of most businesses. According to IRS tax return estimates for 2003, 92% of businesses pay the personal income tax (for example, as sole proprietors, partnerships or S-Corporations), rather than the corporate income tax.

So, it's important for small businesses and the economy in general that the 2011 tax hikes be avoided. To tap the full potential of the 2003 tax cut, the reductions in personal income tax rates should be made permanent, and the sooner, the better.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.