Common Sense and Taxation

David, over at Artful Articulations posted about this paper this morning, which postulates about the tax rates necessary to close the gap between our government’s spending habits and its revenues.

I started to leave this as a comment, but it got too long (surprise, surprise…as any regular readers know, brevity is not exactly my strong suit) so I decided to bring it over here.

I’m no economist, but I did stay in a Holiday Inn Express last night…and besides: basic economics isn’t exactly rocket surgery.

What the paper (and even they admit this) doesn’t take into account is that human productivity and income are not constants in this equation…they are variables.

Increasing tax RATES does not equate to increasing tax REVENUES because as taxation increases, the rewards for a person’s productivity decrease. A the rewards for productivity decrease, so do the incentives to engage in that productive behavior. People begin to deem their time to be more valuably invested in other pursuits.

In fact, a portion of time that would have been invested in the productive, income producing activity ends up being invested in actively working to AVOID the increased taxes on that income. Not only is the time lost from productive, taxable income producing activity, but it is reinvested in actively SUBVERTING the goal of taxation in the first place.

John Kennedy, Ronald Reagan, George Bush and others have all enjoyed the benefits of this phenomenon when they reduced tax RATES and enjoyed the benefits of increased tax REVENUES.

By decreasing the cost of each unit of productive activity, they encouraged people to engage more of their time in that productive activity. It’s like the old sales axiom “making it up in volume”. The government was taking less of each dollar of income, but with the incentive to work harder, more dollars were being made, resulting in increased revenues overall.

It’s just common sense.

Of course, there is a “balance point”. If the tax rates are set below that point, productivity can reach its peak and revenues will be below maximum. At that point, increasing tax rates will result in increased revenues…but our rates haven’t been below that balance point in several generations.

The key is to find the most EFFICIENT tax rates…a concept wholly inconceivable to the current crop of would-be tyrants in Washington. Government efficiency is an oxymoron if I’ve ever heard one…as a result, the imbeciles in DC insist that they can just raise the tax rates on “the rich” to pay for all of their expensive boondoggles.

Tax rates on “the rich” are already over the “efficiency” tipping point. The top 5 tax brackets are already over 25%. I don’t know what the most efficient tax rate would be, but being a Christian, I place a lot of faith in God’s judgment. God set the rate at ten percent and I’d be willing to bet that the “sweet spot” for tax rates versus revenues is right around that area. Maybe as high as 15%. But I have no doubt that 25% and above is not the most efficient tax rate…which means that increasing those rates on “the rich” will actually drive revenues DOWN, not up.

There is simply no way to tax our way out of this deficit and debt…and I suspect that Congress is well aware of that. The house of cards that is our economy is going to fall at some point. They’re just gambling on the hope that it won’t happen until they’re safely out of office, enjoying their lifetime benefits package and unearned income.

2 thoughts on “Common Sense and Taxation

  1. Well said, Curt.

    As you noted, just because you triple tax rates, doesn't mean you triple tax revenues, as the incentives to produce disappear as rates rise above a certain level. And a 95% top marginal tax rate will almost certainly disincentivize the most productive citizens.

    And the projected tax rate increases are just to pay off the deficit, not the trillions of dollars of public debt or entitlement spending that we're on the hook for.

    As you noted, there is no way to tax our way out of the hole our government has dug (and keeps merrily digging!) for ourselves and our children.

    When the whole thing eventually collapses, it won't be pretty.

  2. I agree 100%! That's why states like NYC & California with high tax rates are suffering with less & less revenues along with higher unemployment rates, while States like Texas with lower tax rates are enjoying more tax revenues & job growth.

    We're in big trouble with the current morons running our Country. We're trying to get our economy going, but they are slamming on the brakes. Just today the House passed that health care bill, 700 Billion in new taxes. They're either Idiots or Traitors, I'm leaning towards Traitors.

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