It's been said that the only certainties in life are death and taxes. With respect to taxes, I'd suggest that stupidity also follows along.
I have watched with great despair as politicians debate tax rates. Nowhere is this discussion more perverse and misguided than in the United States.
Tax the rich because they can afford it....say Democrats.
There is a problem of overspending not undertaxation.....say Republicans.
Both sides are being equally stupid and simplistic but I shall focus on an argument often made by Republicans.
Virtually every Republican with broad name recognition has at some point made the argument that cutting taxes will increase government revenues by stimulating the economy and creating jobs which will lead to higher tax revenue as more people earn taxable income and at higher rates.
When Ronald Reagan made this a part of platform in 1980, a fellow Republican named George H.W. Bush gave it the rather caustic label of "voodoo economics." So which is it? Do lower taxes result in higher tax revenues or do lower taxes result in lower tax revenues?
Well the truth is that both were right which only makes the debates happening now even sillier.
Take an example of a marginal tax rate of 99% which is increased to 100%. This will certainly result in lower tax revenues as people will have zero incentive to work since they will get to keep none of the fruits of their labour. So it is fairly easy to see that a cut in tax rates from 100% to 99% will increase tax revenues. My guess is that a cut from 99% to 98% will have a similar effect.
Is there a point at which cutting taxes results in lower revenues then? Well of course. A cut from 1% to 0% might increase economic activity but it most certainly will result in a reduction in taxes to zero. My educated guess would be that if you halve the marginal tax rate from 2% to 1%...then this will also result in lower tax revenue.
The above example would lead to a conclusion that somewhere below 100% there is a level at which raising taxes results in lesser tax revenue and somewhere above 1%, there is a level at which cutting taxes would result in lesser tax revenue. So somewhere between 0 and 100% is a tax rate below which cutting taxes will result in lower revenues and above which raising the rate leads to lower revenue.
So basically anywhere other than the optimal point would result in lower tax revenues. Now I don't know where that optimal level is and it might not even be the same level from one year to the next. However, I do know that the highest rate in US history was 94%. (Does that seem awfully close to 100%?) When Reagan came into office, the rate was 70%. Currently it stands at 33%.
It is most irritating when I hear politicians talking about stimulating the economy by cutting taxes. Listening to some Republicans you would think that Moses came down from the Sinai with a commandment that says "Thou shalt cut taxes....always and forever more."
Paying taxes is not like famine and pestilence where the ideal number is always lower...but you wouldn't know that from listening to some Republicans.
As my simple example shows, there would be a point at which lower tax rates would result in lower tax revenue. This should serve as a caution to Democrats as well. Raising taxes on the wealthy should not be done for reasons of class warfare or resentment. The goal should be to raise money for government operation and in doing so, they should be mindful of not creating a disincentive to earn more income.
When someone says "raise taxes on the wealthy", i often ask to what level should it be raised? Usually there is no answer because it really wasn't thought through beyond "they're rich so they should pay more." When someone says "cut taxes because it will stimulate the economy and lead to more revenues", i will ask to what level it should be cut.
Both sides simply want "more" or 'less" without asking themselves what the "RIGHT" level of taxes should be. My guess is that the United States is pretty much at a point where cutting taxes will lead to lesser revenues not more. My guess is that an increase to the marginal tax rate would lead to greater government revenues. I think it's probably 10% higher before it becomes a cause of lower revenues.
I don't know what the right number is but I do know that I don't ever hear politicians speaking of the 'right' level of taxes.
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According to Rick Perry nearly 50% of people in US pay no tax at all and they breath the EPA approved air, drink the city water and all of them earn too little to be in the tax net - his solution? Tax them.
ReplyDeleteWarren Buffet, second richest citizen in the US, who has a company where each share is more valuable that the US median salary - therefore the exact type of American that supposedly no longer bother to go to work if the tax rate went up by 1% - suggests the rate is too low.
Who do you believe? The guy who was quite rich and became the second richest citizen or a governor of Texas who is merely wealthy figures by adding to the base the taxes will roll in?
Me? I suggest we set up a bank in the US and take deposits from poor republicans while campaigning for Reagans smaller government and insisting the judicial, penal, SEC and Fed reserve bank are shrunk and let the Market regulate itself.... It'll work... And if it doesn't? We'll have squared the judiciary from the inside Enron style.... It's got to work....
Aidan, I don't think Warren Buffett was helpful either. Buffet made the point that his tax rate was lower than his secretary's. This type of comment adds to the stupidity. His income is virtually all in the form of dividends. Dividends are taxed at a lower rate in the hands of the recipient because the corporation paying the dividends has already paid income tax. Hence lower taxes on dividends are meant to avoid the perversity of double taxation. If the corporation paid dividends from pre tax income...then Buffet's argument is valid.
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