Taxes and Government Spending

I’ve got a question for my readers who are of the Democrat persuasion (or anywhere left of that.. socialists and marxists are free to respond as well).

I’m going to make a broad assumption that you all want the Federal Government to spend more money on entitlements (welfare, health care, social security, etc). Obviously, there are some exceptions to the rule, but this seems to be the overarching theme of most liberal Democratic ideas. Give more money to more people that need it.

Here’s my question. If you want to give more tax revenue away to those in need, why do you also want higher taxes? The case has been made, pretty well in my opinion, that increasing taxes will end up netting less revenue for the Federal Government. If that is so, wouldn’t the smartest idea be to cut taxes to the point where it brings in the most revenue for you to spend? Let’s look at a graph courtesy of dalefranks.com

This is called “The Laffer Curve”, named after a professor at Pepperdine University (Go Wave!). The basic idea of this graph is that when your tax rate is 0%,  the federal government will bring in 0 dollars. As that tax rate increases, the amount of money the federal government brings in rises until a certain point is reached (we don’t know where that is) and revenue starts decreasing because the incentive to produce goes down as tax rates increase. So once you get to 100% tax rates, revenues are once again zero.

This is important to understanding how any income tax system works because the goal for a government is to have the lowest tax rate that brings in the most revenue. The problem is, no one knows exactly where certain tax rate delineations are on that graph.  It may very well be that the current 35% top bracket rate is at the peak of that graph. I think its obvious that its not on the other side, because as all of us know (or should) since the Bush tax cuts, revenue to the federal government has increased much faster than was even expected. The deficiet has been shrinking the past couple years (though I’m sure it will increase as the current party in control of both houses of congress is planning the biggest tax increase ever) because we CUT taxes. Cut in taxes… increase in revenue.

So I ask, why do you want higher taxes?

The only thing I can come up with is that you want to promote class warfare in order to keep yourselves in office. As long as you keep telling the poor and the lower middle class that you are sticking it to the rich, they will keep your guys in office.

Tell me I’m wrong here and that there’s some other reason besides hatred of people who produce?

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5 responses to “Taxes and Government Spending

  1. I don’t think we ought to give more entitlements, but as an economics major, I want to play devil’s advocate. First, you say that you think that before the Bush tax cuts, that we were on the right side the curve because revenues went up after the tax cuts. That statement makes several assumptions such that 1) he economy stood still during that time, and 2) tax enforcement stood still.

    Also, what is with this “the deficit has been shrinking.” I’m not sure that bears any resemblence to reality. It may not be a problem for several reasons, but our deficit in real dollars is larger than it has ever been.

  2. Well, yeah Y, as long as the deficit as a percentage of the GDP is fine, we’re ok. But the deficit has been shrinking

    http://www.washingtonpost.com/wp-dyn/content/article/2006/07/11/AR2006071100080.html

    In regards to the economy standing still, isn’t that the point of the laffer curve? When you cut taxes, the economy grows, bringing in more revenue? However, you are correct in aknowledging that I don’t know about enforcement, but I will say that lower taxes encourage people to follow the law. When you have a 70 percent top bracket, that’s a lot more incentive to find as many loopholes as is possible, no?

  3. I tend to think that taxes and our government in general is incredibly corrupt, and that will lead to all sorts of other problems, of which tax evasion is one of the smaller ones. The solution, unfortunately, is a social upheaval the size of which no one would really want to think about.

  4. I’m all for some kind of social upheaval. We are long passed the point where Thomas Jefferson said we need to throw off the oppresive Govt.

  5. This time history graph of top taxs rates and the income share of the top .1%, that is the group most strongly effected by the top marginal tax rates, gives some indication how the income of that group is responds to taxes. When rates are greater than 50% change in taxes cuts seem to have little effect on income, certianly not enough to make up for lost revenue.
    http://visualizingeconomics.com/

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