July 23, 2011
Raising Taxes Not RevenueBy Tom Trinko
There's a lot of talk about increasing taxes these days. But that's not the real issue. The real issue is can, and should, we increase government revenues?
When liberals call for tax increases they mean increasing tax rates or instituting new taxes. But what liberals say they want is more government revenue.
The confusion about the relationship between tax rates and revenues comes from the fact that liberals and the media assume that increasing tax rates and/or establishing new taxes will increase government revenue. But that's far from clear.
Theoretically there are two ways to increase revenue. Rates can be increased or the tax base, the amount of money that gets taxed, can increase.
Common sense, and past history, shows that increasing tax rates can cause people to not invest and even Obama, in August 2009, said it was bad economics to raise taxes in a recession.
When people aren't spending, increasing their taxes will just cause them to spend less and worsen the overall economy. But worsening the economy shrinks the tax base and hence can result in lower revenues, even if the tax rates have been increased.
While increasing rates on the 51% of Americans who pay federal income taxes helps no one other than the government, growing the economy and increasing the tax base provides new wealth for all Americans.
Raising taxes on the 49% of Americans who don't currently pay taxes might raise revenue but at a huge expense to the economy. The majority of those who don't pay taxes don't have large amounts of disposable income. Increasing their tax rates would force them to reduce spending and hurt the economy.
While in the interest of fairness it may be good to ensure that all working Americans pay taxes now is not the time to add that drag to the economic equation.
Hence it would seem clear that increasing rates shouldn't be the choice of first resort. Not because of any concern about fairness but simply because increasing rates has a good chance of not actually increasing revenue.
Conservative economists have historically pointed to an obvious conclusion. At some tax rate the revenues start going down. This is just common sense. If the economy is going well and the tax rate is 0% increasing it to 2% will probably increase government revenue. But if the economy is bad, so that people don't have a lot of money for investment, and the tax rate is 98%, raising it to 100% would probably reduce government revenues.
Capitalism works because human beings are willing to work hard if they can in return get rewarded. Increasing the tax burden beyond some point reduces the reward to the point that a lot of people won't put in that extra effort because the reward is just not worth it t them.
The question becomes where is the right tax rate that both funds a reasonable government and lets individual Americans achieve the American dream?
Generally speaking, conservatives believe that the current tax rates are already reducing the tax base rather than helping it grow. For example, when Reagan cut the tax rates, especially those on those evil rascally rich people, government revenues went up; sadly, the Democrats in Congress increased spending even faster. Bush's tax cuts had a similar effect.
Why? Because the rich, i.e. the 51% of American households who pay taxes, suddenly could actually make money by investing rather than seeing a very significant portion of their hard-earned profits go to the tax man. As a result they invested their money and their labor, the economy boomed, and the tax base went up.
When the economy boomed those rich people made a lot of money. But the average Joes and Janes did pretty well too.
Why then do liberals keep calling for increasing the tax rates rather than trying to grow the tax base? The answer is that a concise economic definition of a liberal is one who wishes to be philanthropic with other people's money.
Liberals feel there is a moral imperative to force those the liberals consider to be rich to donate money to the government in the name of "fairness." At some level liberals don't care about revenue so long as the "rich" pay their "fair share." To liberals, taxation is a tool for forcing social equality irrespective of the differing work ethics of Americans. Of course, the liberals in government get to decide how to spend that money and who should benefit from it so perhaps their concern is not as altruistic as it might seem at first glance.
Following the liberal prescription of increasing tax rates has never helped an economy recover. Hence it's necessary to reframe the debate.
The first question is: does the government need more revenues or should it be able to execute its constitutional functions with the money it currently receives?
After resolving that issue, if it is determined that the government does need more revenue, perhaps just to pay off the debt if nothing else, the question must be cast as how government revenues can be increased, not whether or not tax rates should increase.
Once the discussion is about revenues, the liberals will be forced to explain why they think increasing tax rates in a recession will in fact increase revenues. Conservatives, on the other hand, will be in the enviable position of saying that they want to balance the federal budget by cutting unnecessary spending and by making all Americans richer.
Many Americans who support a tax increase are really saying that they support more government revenue. Once they're given another, far more palatable option, for increasing government revenue, they'll stop calling for tax increases.
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