The Politics of Taxation
The politics that surround questions of taxation demand that
governments strive for a system that seems fair to the
most people. It precludes actual fairness or reasoned thought
in the science of funding government. In fact, it mostly just
precludes any science or logic. The idea that you can generate
more revenue with higher tax rates is a perfect example.
What rate Works?
What is lost in all the debate over tax increases versus tax
cuts, is science. The Laffer curve, for example shows the relationship
between tax rates and tax revenue collected. I'd guess that less
than 5% of people understand this simple principle, but it is
crucial to proper governance. It is the idea that as you raise
taxes, you reach some point where actual revenues collected start
to drop.
You can understand this at the extremes. If the government
took 95% of your income in taxes, would you work much? No? Do
they get any taxes if you don't work? No. More money will actually
be collected if they take a lower percentage, right? Add to that
the fact that every dollar the government takes can't be invested
into new businesses, which would create more income, and therefore
more taxes, and you can see that there is a point of diminishing
returns.
Where is it? The science isn't that exact yet, but it seems
to be somewhere around 15% to 25% as a total tax burden (federal,
state and local). What this means is that if tax rates go higher
than the top of the curve, the government actually collects less
money. So even if a person or society want all sorts of social
welfare programs, they have to realize that there is an ideal
rate of taxation to get the most money to pay for these programs.
Tax more heavily, and you get less, not more.
Politics trumps science, of course. Imagine if wealthy people
are taxed at a rate that has them spending more time looking
for loopholes than ways to make more taxable wealth. (If your
friends don't get it when you explain this, point out that 20%
of a million is more than 50% of three hundred thousand, so production
matters - not just rates). Will a politician have a chance if
he explains that the government can collect more taxes from the
wealthy if the rates are lowered?
Most won't even try.
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