BuddyGroom wrote:TomatoPie wrote:
Sadly, he shares with his fellow Democrats the misbegotten notion that tax increases are good, which has never been the case in my lifetime.
So you don't believe that the "luxury tax" increases included in the 1993 budget didn't play a role in producing the deficit reduction that followed - and ultimately the balanced budgets the country enjoyed under a Democratic president. (To be clear, I am not arguing that the 1993 budget solely produced those results - a booming economy and later budgets, most reflecting compromise between the Clinton White House and Republican Congress, also played huge roles.)
Here's a question I always want to ask people who reflexively oppose tax increases - Republicans typically argue that tax increases do not increase government revenues (because people adjust their spending/investing patterns, et al) but tax cuts often do increase revenues because they stimulate the economic activity that produces tax revenue.
Okay, so if tax increases never increase revenue but tax cuts always do, what would happen if we kept cutting taxes all the way down to 0%?
There is a point, in other words, where tax cuts surely will reduce revenues. As for tax increases increasing revenue, the 1993 budget, again, offers ample proof that, if you consider increased revenues desirable, tax increases can produce them.
I'm glad you asked.
Tax rates affect behavior. For the sake of simplicity, let's discuss income taxes first.
I thin we can agree that there is a rate at which tax revenues are maximized. It is more than 0% and less than 100%. This is why I say that in my lifetime, there has never been a bad tax cut or a good tax increase, because IMO our tax rates have always been well above the level which will produce optimal tax revenues.
If tax rates are 40% and we cut them to 35%, the immediate term effect will be a drop in revenues. Tax rates affect behaviors, but not instantly. The lower rate encourages more economic activity and thus grows the taxable base, and this effect compounds over time. Over time, the effect of tax rate cuts is to grow the tax base so that tax revenues rise.
The evidence is clear when you look at revenues in the wake of the Bush tax cuts. A drop at first, followed by dramatic increases in tax revenues. I know this troubles those who like punitive tax rates for the wealthy, but its undeniable.
I don't know what the optimal rate is, since we are so far above it. I would guess it should be around 15%.
Further, I'm not sure it's desirable to maximize government tax revenues. For certain, it's not desirable to balance the budget. Read Ken Fisher's new book to understand why.
You can be pretty sure that in your lifetime, we will never come close to having tax rates that are too low. We could cut them in half and they'd still be too high.
