The Tax Policy Charade

Tax policy discussions are meant to​ do what? Arrive at​ a​ rational policy,​ or​ garner votes. I think it​ is​ the​ latter. What is​ lost in​ all the​ debate over tax increases versus tax cuts,​ is​ science. Contrary to​ what most people may think,​ there is​ some scientific study of​ taxation.

Applying the​ Laffer Curve to​ Tax Policy

Invented by Arthur Laffer,​ the​ Laffer curve shows the​ relationship between tax rates and tax revenue collected. it​ demonstrates a​ simple principle that very few people understand,​ but one that is​ crucial to​ proper governance. it​ is​ the​ idea that as​ you​ raise taxes,​ you​ reach some point where actual revenues collected begin to​ drop.

This is​ perfectly logical,​ and you​ can understand it​ at​ the​ extremes. if​ the​ government took 95% of​ your income in​ taxes after the​ first $10,​000,​ would you​ work much after that? Do they get any more taxes if​ you​ don't work more? No. More money will actually be collected if​ they take a​ lower percentage,​ right?

Now add to​ this the​ fact that every dollar the​ government takes can't be invested into new businesses or​ the​ expansion of​ existing businesses. New business investment means new income,​ and therefore more taxes. This isn't hypothetical - you​ can't invest what has been taken away from you. a​ friend of​ mine put off hiring employees and expanding his business for a​ long time because of​ a​ state business tax that would dramatically increase his taxes if​ he hired help.

That was a​ truly perverse tax policy,​ but any raising of​ taxes has to​ at​ some point cause a​ lowering of​ profits to​ the​ point where less is​ actually collected in​ taxes. There obviously has to​ be a​ point of​ diminishing returns. Where is​ it?

The science isn't that exact yet,​ but the​ principle is​ clear. the​ top of​ the​ curve seems to​ be somewhere around 15% to​ 25% as​ a​ total tax burden (federal,​ state and local). What this means is​ that if​ tax rates go higher than that 15% to​ 25%,​ the​ curve goes down; the​ government actually collects less money.

This isn't a​ republican or​ democratic issue. When Kennedy lowered tax rates and when Reagan did so (from a​ high of​ 70%!),​ tax revenues soared. the​ fact that under Reagan the​ government spent even faster than the​ rising revenues is​ another issue,​ but the​ lesson was clear: the​ Laffer Curve is​ an​ accurate description of​ tax rates and tax revenue.

In other words even if​ a​ political party or​ a​ society wants all sorts of​ social welfare programs,​ they have to​ realize that there is​ an​ ideal rate of​ taxation to​ get the​ most money to​ pay for these programs. Tax more heavily,​ and you​ get less,​ not more. This is​ the​ reality,​ whether people like it​ or​ not.

The Politics of​ Tax Policy

Quite often,​ people don't like this reality,​ and politics trumps science. For example,​ wealthy people are often taxed at​ rates that have them spending more time looking for loopholes than ways to​ make more taxable income. This lowers production,​ and so lowers the​ potential taxes collected. if​ your friends don't get it​ when you​ explain this,​ point out that 20% of​ a​ million is​ more than 50% of​ three hundred thousand,​ so production matters - not just higher tax rates.

What happens if​ we recognize this? Will a​ politician explain that the​ government can collect more taxes from the​ wealthy if​ the​ rates are lowered? When they try,​ they lose votes. Long term there is​ real hope,​ because the​ principle is​ actually easy to​ understand. Short term it​ is​ politically difficult to​ say you​ want to​ lower taxes on​ the​ wealthy to​ a​ scientifically determined rate of​ greatest efficiency.

Many people want to​ believe that the​ rich can be taxed enough to​ pay for anything we want. the​ reality is​ that if​ most of​ the​ income of​ the​ wealthy was taken it​ would fund government for only a​ few weeks. There are more middle class than wealthy people,​ and more total income there,​ so that is​ where most taxes have to​ come from. Voter's don't know this or​ don't like this,​ and politicians tell them what they want to​ hear. Hence the​ tax policy charade.
The Tax Policy Charade The Tax Policy Charade Reviewed by Henda Yesti on July 04, 2018 Rating: 5

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