Why cutting taxes works, and raising taxes doesn't
- Wednesday, June 14 2006 @ 02:44 PM CST
- Contributed by: filbert
- Views: 2,407
Writing in Human Events Online, Cato Institute senior fellow Alan Reynolds explains (about as clearly as an economist can) why tax increases never raise as much as the politicians claim, while tax cuts actually increase the tax revenue collected:
It's simply human nature. Some people of course have difficulty with the concept of people acting like people. Using Reynolds' words at the end of his essay:
More than a dozen highly regarded studies have shown that the amount of income reported by those facing the highest marginal tax rates is extremely sensitive to changes in those tax rates. This is measured by the "elasticity" (responsiveness) of taxable income.
Translated into English: rich people are not stupid. If you raise tax rates, they will figure out ways to avoid the tax. Economists call this "elasticity."
. . .
What all this means is that cutting the top tax rate in half has resulted in much more income being reported and taxed in every country that tried it -- the United States, United Kingdom, New Zealand and India, for example. Some mistakenly imagined that proved the rich suddenly became richer when U.S. tax rates fell from 1986 to 1988. What it actually proved was that the rich reported more taxable income when tax rates on an extra dollar became more reasonable. These facts are not seriously in dispute regardless what portion of this widely observed "Laffer Curve" phenomenon was due to a change in actual income (a supply-side effect) or to a change in the proportion reported to tax collectors.
Translated into English: no, really, rich people are not stupid. If the government takes less in taxes, the rich people have less incentive to find ways to shield their income/assets from taxation. It's more of a pain in the a$$ to shield their income than it is to just pay the tax. Plus, taxable sources of income (stocks, real estate, etc.) tend to have higher rates of return than non-taxable sources (municipal bonds, etc.), so actual income increases.
It's simply human nature. Some people of course have difficulty with the concept of people acting like people. Using Reynolds' words at the end of his essay:
Get over it.