Will lower taxes mean more revenue to pay for public services ?

[tradeunionsupporter]

Right Wingers claim that lower taxes on the Rich/Wealthy will mean more tax revenue for the Government to pay for public services can this claim be refuted or debunked thank you I have also heard that lower taxes and tax cuts for the Rich/Wealthy will lead to budget cuts for social services that help the Poor and the Working Class ?


http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates

[Tommy4ever]

This logic makes no sense. Low taxes on the rich leads to more money for public spending?

.....

NO!

Surely the sure idiocy of that statement refutes itself?

[Proukunin]

this sounds like something glen beck would've said. Low taxes on rich means more money for rich.

[Lt. Ferret]

the logic behind it is they spend the money and grow the economy, and you'd need to tax less of it in total but it'd be larger than before and you'd get more money. but the level it would have to grow is almost astronomical for it to really work.

[Chris]

Yeah, it's the same old "trickle-down" argument. If the wealthy gets even more wealthy, then the free market fairy will reward society by making everyone more wealthy. Since wealthy never spends money on consumer goods or conspicious consumption. Never. They just invest their money into new projects, never once thinking about themselves or using more resources to crush the competitition, leading to less overall prosperity for society. But the wealthy would NEVER do such a thing! /sarcasm

[danyboy27]

Its all based on the romantic notion that the rich people will voluntarly stimulate the economy to make it grow.

Romanticism is really something dangerous, especially when applied to economics.

I tend to Leave Romanticism for theater movies, songs, arts, where it should be.

[Skooma Addict]

Depends. At some tax levels lower taxes will bring more revenue, while at other tax levels lower taxes will bring less revenue.

[Bardo]

Before we even do anything to the tax rate we have to close the loopholes which allow corporations and wealthy individuals to pay nothing in income tax. When an ordinary middle/working class individual skips out on taxes the government is right there to put the heat on. Just ask my dad :p

The idea that higher taxes on the wealthy and corporations leads to less revenue doesn't make logical or mathematical sense. Also, I find it hard to let my heart bleed for people making$250k who are perfectly fine with taxing the millionaires. "It's not the rich that you want, it's the super rich!"

[Dumb]

The problem with this theory is the assumption that the rich and big business would use the tax cuts to invest in economically productive endeavors.

Steve Kanga's Liberal FAQ (http://www.huppi.com/kangaroo/L-capgainsspur.htm) offers a good run-down of this myth. While the author wrote from a liberal perspective, he was still effective in dismantling many right-wing arguments (though you're best off ignoring 99.9% of the arguments he makes in favour of liberalism). In the linked passage, he addresses this myth regarding the capital gains tax in particular:
Yet another problem is that not all capital assets are "good" forms... They can be -- at least from a production and job-creation point of view -- very close to meaningless, like investments in art, wine, antiques, classic automobiles, property, junk bonds or paper entrepreneurialism. One of the more notorious examples is the tax shelter. Because the sale of capital assets are taxed only when they are profitable, investors hid much of their income in these shelters. In the late 70s, when capital gains became much lower taxed than income, tens of thousands of useless or empty office spaces were opened up nationwide, designed to "lose" money. Many of these tax shelters were for esoteric assets like collectibles, freight cars and even llama breeding. Between 1979 and 1985, tax shelter "losses" jumped from about $10 billion to $160 billion a year (1) ...

...But what about the argument that capital gains tax cuts will spur investment? The supposed economic benefits are so minor as to be insignificant. You can find any number of conservative think tanks spouting all kinds of "evidence" that the capital gains cut will restore America to a Golden Age of Prosperity. However, serious economists dismiss these notions as absurd. In 1980, Lawrence Summers (one of the nation's top economists, and then a conservative) conducted a definitive study that found that eliminating the capital gains tax completely would raise U.S. output by only 1 percent over the next 10 years. (3)
As we're seeing at present, U.S. businesses have also chosen to sit on a very, very large sum of money. Ezra Klein outlines this $1.8 trillion problem (http://voices.washingtonpost.com/ezra-klein/2010/07/why_are_corporations_sitting_o.html):
At this morning's jobs discussion. I asked the panelists -- Labor Secretary Hilda Solis, AFL-CIO President Rich Trumka, Chamber of Commerce honcho Tom Donahue and Columbia University Professor Jeffrey Pfeffer --why businesses are sitting on $1.8 trillion in reserves...

...At this point, Pfeffer offered a useful addition: Businesses are herd animals, he said. They tend to spend all at once and hoard all at once. So the fact that many of them are hoarding now is convincing the rest of them to hoard now, and the question is how you break that cycle so a few major players step out and invest and make their competitors feel like they'd be missing out if they didn't do the same.
Tom Saler of the Milwaukee Journal-Sentinel presents a much higher $3 trillion figure (http://www.jsonline.com/business/62267237.html).

Paul Krugman argues (http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/) that this phenomenon has a lot to do with falling prices and low inflation, even the threat of deflation. As he explains, "...when prices are falling, just sitting on cash becomes an investment with a positive real yield..." - why spend money today when you know that the same sum is going to be worth more 5 or 10 years down the road?

This issue punctures a big, fat hole in trickle-down economics: corporations already have more cash than they know what to do with. If corporations are sitting on the cash they already have - anywhere from $1.8 trillion to $3 trillion of it - then why would tax cuts encourage them to engage in any further economic activity?

[Demogorgon]

The thing with the Laffer Curve is that it has appeal because it would simply be brilliant if it were true. We could have our cake and eat it, lower taxes and higher public spending! There is a very strong incentive to convince oneself that it is true, but as my Mother taught me from a very young age "if it sounds too good to be true, it usually is".

Except in very specific circumstances tax cuts lead to reduced revenue.

[Skooma Addict]

The circumstances where tax cuts lead to increased revenue aren't any more specific than circumstances where tax cuts lead to decreased revenue. There is a tax rate which will lead to maximum revenue at any given time (even though this will constantly be changing over time), and if this maximum return rate is below the current tax rate, then cutting taxes will lead to increased revenue. If it is above the current rate, then raising taxes will lead to increased revenue.

[Demogorgon]

The circumstances where tax cuts lead to increased revenue aren't any more specific than circumstances where tax cuts lead to decreased revenue. There is a tax rate which will lead to maximum revenue at any given time (even though this will constantly be changing over time), and if this maximum return rate is below the current tax rate, then cutting taxes will lead to increased revenue. If it is above the current rate, then raising taxes will lead to increased revenue.
That presumes that the Laffer curve is accurate and that there is a single revenue maximising tax point, however there is little evidence of that. It is almost certainly true for instance that a 50% tax rate will collect more revenue than a 100% tax rate (though the latter will still get something, throwing off the Laffer curve), but it is perfectly possible that the same or greater revenue could be collected at 70% while a lower rate is collected at 60%.

Besides, the argument cannot even be taken as simply saying a cut in taxes will magically boost revenue, even though some people clearly want to believe that. The argument is rather that tax cuts lead to economic growth and that in turn will boost revenue, not that there is an instant return. However it cannot simply be taken as a simple fact that a tax cut will spur growth. If that were the case we would in the first instance see tax cuts always followed by growth (and tax rises always slowing growth) as well as lower tax economies inevitably having higher growth. We do not see that however.

[jake williams]

The Laffer Curve is almost certainly true over some range. If in a capitalist country net tax rates were raised to, say, 80 or 90% in a short time period, it would shipwreck the economy and revenues would fall. Most economic activity left would move into the black market.

It is the case that the people most eagerly pushing the theory are cynically arguing that a (fuzzy) revenue maximizing point is somewhere other than where it is, for personal gain. But the theory is true - there is some theoretical point where raising rates will decrease revenue.

And all that has no bearing on the fact that capitalism fundamentally misallocates productive resources. The fact that the ultra-right sometimes gets the economics right is only proof that they advocate an irrational and barbaric system, not that we should accept that barbarity.

[RGacky3]

The highest tax rate in the US was 90% for sometime, it did'nt shipwreck the economy.

Really when its gets that high it depends how the economy is structured and how healthy the fundementals are.

If your the camen islands for example, raising your tax rate might at a point lower revenue, however in the europe, with a healthy consumer base and healthy economies, thats not at all the case.

In the US there is no way in hell lowering the tax rate will raise revenue.

[jake williams]

The highest tax rate in the US was 90% for sometime, it did'nt shipwreck the economy.
I said the net tax rate, for the whole economy, and I said immediately. The top marginal rate on some types of income was 90%. That's a very different thing.

We could also live in a society where in some sense everything was "taxed", in that everything produced was distributed and consumed socially, and such an economy could function, but it wouldn't be a capitalist one.


In the US there is no way in hell lowering the tax rate will raise revenue.
That's a separate question.

[RGacky3]

I said the net tax rate, for the whole economy, and I said immediately. The top marginal rate on some types of income was 90%. That's a very different thing.


My bad.


We could also live in a society where in some sense everything was "taxed", in that everything produced was distributed and consumed socially, and such an economy could function, but it wouldn't be a capitalist one.


then you don't have a profit motive or a market, so yeah, whole different issue.


That's a separate question.

Was'nt that the OPs question?

[jake williams]

Was'nt that the OPs question?
Fair enough, but I do think it's important to distinguish the theoretical fact of the Laffer curve argument - which is clear true, and whose denial deserves some derision - and the factual argument (that lowering America's top marginal income rates will raise revenue), which is clearly false.

[RGacky3]

I think the optimal tax rate depends on the nature of the economy, is capital static or fluid? Is it heavily consumption based? Like I said, raising taxes in the Cayman Islands, for example, would definately damage revenues, but in say ... Garmany, where you have a strong consumer base, a lot of relatively static capital, and you have good trade policy, they can raise the tax rate more without risking de-investment or capital flight.

But in an economic crisis, lowering rates to somehow increase revenues is idiotic, even with lower taxes no one is gonna invest if there is nothing to invest in.

[Demogorgon]

- which is clear true, and whose denial deserves some derision -
But there is no evidence that it is true. Where is the evidence that there is a single revenue maximising point?

[Dimmu]

Just BS.. We are starting to see the same arguments being made in Finland.. I mean Finland has since 1950's has been quite a Scandinavian welfare country.. But now after Sweden started with their neo-liberal policies the Finnish center-right party is following in the same steps..

What they are proposing is a lowering of income tax for everyone, lowering of the corporate tax.. But at the same time they are raising the VAT tax and other "invisible taxes". So what we are seeing is a movement towards a flat-tax.

[danyboy27]

Depends. At some tax levels lower taxes will bring more revenue, while at other tax levels lower taxes will bring less revenue.

wel of course if you lower the taxes of the poor it will stimulate the economy.

but this isnt based on Romanticism, this is pure logic.

a guy who earn 24 000 dollar a year or less will spend his extra money on commodity and goods, beccause he dramatically need those to live.

[jake williams]

But there is no evidence that it is true. Where is the evidence that there is a single revenue maximising point?
The idea of a revenue maximizing "point" is a bit misleading because for any potential set of empirical data the relationship between rates and revenue would be very fuzzy, and especially since there isn't a single tax "rate" in the economy, and because the effects of tax policy are complex, the whole system of tax policy is too complex to simply solve for some maximum revenue point. But the point is that one cannot simply maximize revenues by maximizing taxes.

[Demogorgon]

The idea of a revenue maximizing "point" is a bit misleading because for any potential set of empirical data the relationship between rates and revenue would be very fuzzy, and especially since there isn't a single tax "rate" in the economy, and because the effects of tax policy are complex, the whole system of tax policy is too complex to simply solve for some maximum revenue point. But the point is that one cannot simply maximize revenues by maximizing taxes.
As far as I am aware nobody has ever claimed that maximising taxes leads to maximising revenue. But the Laffer Curve is claiming rather more than the completely obvious point that you won't maximise your revenue at 100%. It claims rather that there is an optimum point in terms of revenue gathering and any increase or decrease from that will decrease the yield. This is wrong, for the simple reason that it is quite possible that increasing taxes might first of all lead to a fall in revenue but further increases could cause it to rise again. Also of course it is mathematically unsound because it presumes no revenue at 100%, when in fact there will still be small bit of revenue. That might sound like a pedantic point but it makes a mess of the mathematics.

The biggest problem though is once we move past the rather abstract argument we are having and attempt to apply it. Proponents of the Laffer curve typically argue that taxes in contemporary Western Countries are higher than the revenue maximising point would be. The fact that that isn't true gives the theory a somewhat questionable practical value. In this country and many of tis neighbours, right wing politicians who were great proponents of the Laffer Curve have (through gritted teeth it must be said) raised taxes lately to reduce Government borrowing. Surely if the Laffer Curve were actually right, they should have cut them?

[jake williams]

As far as I am aware nobody has ever claimed that maximising taxes leads to maximising revenue. But the Laffer Curve is claiming rather more than the completely obvious point that you won't maximise your revenue at 100%. It claims rather that there is an optimum point in terms of revenue gathering and any increase or decrease from that will decrease the yield. This is wrong, for the simple reason that it is quite possible that increasing taxes might first of all lead to a fall in revenue but further increases could cause it to rise again. Also of course it is mathematically unsound because it presumes no revenue at 100%, when in fact there will still be small bit of revenue. That might sound like a pedantic point but it makes a mess of the mathematics.

The biggest problem though is once we move past the rather abstract argument we are having and attempt to apply it. Proponents of the Laffer curve typically argue that taxes in contemporary Western Countries are higher than the revenue maximising point would be. The fact that that isn't true gives the theory a somewhat questionable practical value. In this country and many of tis neighbours, right wing politicians who were great proponents of the Laffer Curve have (through gritted teeth it must be said) raised taxes lately to reduce Government borrowing. Surely if the Laffer Curve were actually right, they should have cut them?
I'm going to quote at length from the Wikipedia intro because I really do think it's relevant.

In economics (http://en.wikipedia.org/wiki/Economics), the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation (http://en.wikipedia.org/wiki/Tax) and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity (that taxable income (http://en.wikipedia.org/wiki/Taxable_income) will change in response to changes in the rate of taxation). The curve is constructed by thought experiment (http://en.wikipedia.org/wiki/Thought_experiment). First, the amount of tax revenue raised at the extreme tax rates of 0% and 100% is considered. It is clear that a 0% tax rate raises no revenue, but the Laffer curve hypothesis is that a 100% tax rate will also generate no revenue because at such a rate there is no longer any incentive for a rational taxpayer to earn any income, thus the revenue raised will be 100% of nothing. If both a 0% rate and 100% rate of taxation generate no revenue, it follows that there must exist (http://en.wikipedia.org/wiki/Extreme_value_theorem) at least one rate in between where tax revenue would be a maximum. The Laffer curve is typically represented as a stylized graph which starts at 0% tax, zero revenue, rises to a maximum rate of revenue raised at an intermediate rate of taxation and then falls again to zero revenue at a 100% tax rate. However, there are infinitely many curves satisfying these boundary conditions. Little can be said without further assumptions or empirical data. One potential result of the Laffer curve is that increasing tax rates beyond a certain point will become counterproductive for raising further tax revenue because of diminishing returns. A hypothetical Laffer curve for any given economy can only be estimated and such estimates are sometimes controversial. Estimates of revenue-maximizing tax rates have varied widely.


The Laffer curve is associated with supply-side economics (http://en.wikipedia.org/wiki/Supply-side_economics), where its use in debates over rates of taxation has also been controversial. ...

This to me is a pretty good summary of how the Laffer curve is actually understood by economists. Economists study statistical models of complex systems which do (at least sometimes) partially, but always imperfectly, map to real-world data. This is taken for granted by economists, if not their critics. If it were possible to arbitrarily vary the tax rate and cancel other variables - which it isn't - there still isn't an economist who thinks that the data would fit perfectly to a smooth curve. I doubt there are even any who think plausible curves would look parabolic.

The logical point, though, that there is some point between 0 and 100% where raising rates lowers revenue is clearly true, which we both know we both know. I forget my calculus, but if there is a curve between two points, and a value on the curve above the value at either end, then there is one and only one maximum value. This value could recur - perhaps some amount of revenue is raised at several different rates, but it's unlikely. Neither of us think it's going to be sinusoidal. Everything else is provable mathematically, not economically. I think our main disagreement at this "abstract" level is that I believe this is all the "Laffer curve theory" really asserts. There isn't a "Laffer curve" per se that purports to actually show the relationship between rates and revenues, especially a totally straightforward one. I think anyone would even acknowledge that in a complex economy, not just empirical data but model data would show complex responses to rates for significant policies.


I am much more concerned about the policy debate - whether or not we should raise corporate income taxes - than philosophical debates about the utility and meaning of economic models or mathematical debates about applied statistics or optimization problems.

That said, economists using a narrow, and mostly tautologous thought experiment - "the Laffer curve" - can be dangerous in pushing their preferred policy even though the thought experiment is mostly irrelevant to the policy. I tried, perhaps imperfectly, to highlight this irrelevance. The argument, while clear and simple, is initially counterintuitive to a lot of people and makes the economists pushing it sound witty rather than deceitful. Since the argument is basically tautologous, denying it makes us sound like we don't understand basic arithmetic. So I think separating that, and the clearly fallacious policy argument, is useful if "Laffer" is raised.