How Less is More when it comes to Taxes
It seems that the common answer for funding new government programs is always that “we’ll just raise taxes on the rich.” Well according to history and a model by Arthur Laffer the best way to increase government revenue is to cut taxes. In the theory of the “Laffer Curve” there is a point where high and low taxes meet in the amount of revenue they create. This is because when taxes are low there is more money in the hands of private individuals. This money is spent and invested, jobs are created, and all these activities are taxed by the government bringing in revenue and in this situation the tax base is larger and richer as more jobs are created and those salaries are taxed. As you raise taxes the amount of money in private hands decreases therefore the number and potency of the tax base decrease. This phenomenon graphed out creates a curve style graph hence the name. According to Laffer:
“The Laffer Curve itself does not say whether a tax cut will raise or lower revenues. Revenue responses to a tax rate change will depend upon the tax system in place, the time period being considered, the ease of movement into underground activities, the level of tax rates already in place, the prevalence of legal and accounting-driven tax loopholes, and the proclivities of the productive factors. If the existing tax rate is too high–in the “prohibitive range” shown above–then a tax-rate cut would result in increased tax revenues. The economic effect of the tax cut would outweigh the arithmetic effect of the tax cut.” The Laffer Curve: Past, Present, and Future
This curve was perhaps first noted by Muslim scholar Ibn Muqaddimah who wrote in The Muqaddimah “It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.” In the 20th century the curve has been shown to be accurate on at least three occasions. In the Harding-Coolidge presidency (Warren G. Harding died suddenly of heart failure in 1923) the top rate was lowered from 77 percent to 25 percent. Even with this huge decrease in the tax rate government revenue went from declining 4 percent a year to a slow but positive gain of .1 percent a year. During this period unemployment also dropped sharply and economic output doubled. (The Laffer Curve: Past, Present, and Future)
The second time tax cuts increased government revenue was during the Kennedy administration. The top marginal rate was reduced from 91 percent to 70 percent. In the period following the tax cuts government revenue increased from a gain of 2.6 percent a year to 9 percent a year. The final time the curve is evidenced is during the Reagan administration. This time the rate was dropped from 70 percent to 50 percent and then eventually to 28 percent. Once again, even though the rate was significantly lower, the actually taxes being paid rose. (The Laffer Curve: Past, Present, and Future)
So, why does the government not look at the figures and realize it is in their best interest to lower taxes? For one, the current administration is far too entrenched in the idea of class warfare to allow such a thing to happen. As John F. Kennedy once said, “a rising tide lifts all boats.” If the richest Americans have more money to invest then all Americans benefit from increased jobs and opportunity. If this concept were to become mainstream it would negate the polarizing message of pitting the classes against one another. Because there are a lot more physical voting bodies at the bottom of the pyramid then the top, using the “rich few” at the top as scapegoats is politically expedient. Are there bad “rich people?” Of course, there are people of low morality in every economic bracket. We are currently in a recession due in part to actions by some of these people. However, I would argue that more of the blame can be leveled at government actions before, during, and after the burst of the housing bubble. The truth is that if you stop punishing the “rich” to appease the “poor” then you allow them to do what they do best, make money. Then, instead of sitting on that money they will use it to improve their businesses and other investments which usually means more people end up with jobs. They will also use it to buy products which also means that more people are needed for manufacturing. So, if the President is truly serious about lowering unemployment and improving the economy, the best thing he can do is lower taxes and let the private sector work its magic.
