You might wonder how Republicans, who have been yelling a lot lately about deficits and debts and financial peril, can square these concerns with extending a giant tax cut, which will mean less income for a government wading in the red. Well, one way they've been doing it is by claiming that cutting taxes actually increases government revenue. If you cut taxes, people keep their money, use that money to make more money (expanding the economy), and then end up paying more in taxes than they would have if you had taxed them in the first place.
This idea made me curious, so I headed to one of the first places I go when I have questions about the economy—my friend, professor of economics at Northeastern State University in Tahlequah, Oklahoma, Dr. Bryan Buckley.
His response was so good I decided to post it here.
The idea comes from the Laffer Curve. If there is an income tax of 0% then the government collects zero in revenue. If the tax is 100% the government collects zero revenues because people no longer work if they don't get to keep any of the money they earn. So, we can raise the tax rate starting at 0% and increase revenues, but at some point, the tax rate becomes high enough to discourage so many people from working that further increasing the tax would actually decrease revenues. Which means there is some tax rate which would maximize tax revenues.In short, yes, if you tax people enough eventually you will get less revenue than you would if you taxed them less. But taxes would need to be a lot higher than they are now for this to happen. Keep in mind taxes are actually at their lowest levels in sixty years. For more, here is a terrific article from CBS News.
This article surveys a bunch of economists to estimate how high income taxes would have to be before it starts reducing tax revenues. The estimates range between 20% and 70%.
So according to most of the economists in that survey, we could raise income taxes and increase revenues. Also, this study seems to say the same thing.
Cutting taxes will probably not "pay" for itself.
Image: alykat
Here's a question. Why does the media et al refer to the Bush tax cuts? Why is it not the Bush tax rates? Under Bush tax cuts resulted in lower tax rates. We've had those tax rates for several years now. (No further cuts.) At the time, the lowering of the tax rates could not get through both houses of Congress without a compromise. The compromise was that the new rates would not be "permanent" but would "expire" at the end of 2010, at which time the rates would revert back up (increase) to what they were when the cut in the tax rates were made (a tax increase to new, higher rates). Just wondering.
ReplyDeleteAs I understand it, the Bush Tax Cuts refer to two pieces of "tax relief reconciliation" legislation, whose primary result was a change in tax rates. However, they also included cuts in capital gain taxes, the estate tax, alternative minimum tax, dividends taxes, and taxes on retirement plans. I think calling them "cuts" or "rate changes" would be equally accurate.
ReplyDeleteDo you know how these tax rates have effected small business starts or closures? I think it is interesting that if you own your own business you essentially pay double the taxes because the business taxes for yourself and then you pay the taxes on tue money you pay yourself - added together is more like 60% of the money you make. It seems like tax rates, the healthcare costs and social security taxes are all paid in part by our employers. It seems like this tax rate would be above the "Acceptable" tax rate by the people. What are your thoughts on business taxes?
ReplyDeleteI'd like taxes to be low as much as the next guy and I support lower taxes for small businesses. I would point out two things, though. First, Obama wants to let the cuts expire for those making more than $250K a year. I don't think too many small business owners in that tax bracket would be overwhelmingly hurt by an increased tax rate. Two, tax rates were higher than they are now in the 90's when small and large businesses were booming, and this didn't kill them.
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