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Tuesday, October 30, 2012

Taxes Again

I've talked a lot about taxes in the history of this blog. What seems counter-intuitive really isn't, with spending cuts raising revenue.

Here Tom Bethell at the American Spectator explains it another way:
Here’s my one-paragraph sermon on budget basics. Taxrates are prices. Taxes are quantities. Yet they are frequently conflated, as in the phrases “tax cut” and “tax increase.” When tax rates are increased, what happens to revenues? The Congressional Budget Office assumes that they go up by the same proportion. But they don’t. Imagine you are running a money-losing department store, and everyone gives you the same advice: “Raise prices on your luxury goods!” So you do, and the rich shoppers go somewhere else. Now you are worse off. Prices higher, revenues lower. You have learned a lesson. When it comes to prices (or taxes), the rich can move, or move their money, or both.
 Makes sense, right? He goes on:
Unfortunately, confused readers generally work to the advantage of liberals, whose permanent goal is to expand the power of government. As a rule, reporters draw attention to national budget problems only to persuade us that “more taxes” are needed. They mean more revenues, and they assume higher tax rates will produce them.
Spending cuts are equally misreported. Assume that $100 is being spent on some government program (think of it as $100 billion if you want to be more realistic). Now a “5 percent budget cut” is promised—but it’s not what you might imagine. Capitol Hill has 10-year budget projections already built in. So Congress has scheduled, let’s say, $110 (billion) for the same programnext year (a 10 percent increase). Under a 5 percent cut, only $105 will be allocated to the program instead of the projected $110.
So in the end, spending has gone up from $100 to $105 and that’s a 5 percent cut. So it goes. Reporters who write these stories never tell you that a budget “cut” is almost always an increase that has been slightly reduced from an earlier “baseline.” In the end, only the budget wonks understand what’s going on.

The best part: Paul Ryan is a budget wonk! I suspect Mitt Romney is as well, since he's a businessman. You can read more of the article yourself. Don't forget: Come January 1, 2013, we all see unprecedented tax increases coming from a confluence of expirations of cuts and new taxes: Taxmaggedon. Obama isn't talking about it because naturally, he'd rather have votes than inform voters.

1 comment:

  1. Well, it actually is a bit more complicated than that. I'm not arguing for or against higher or lower tax rates, I'd just like to move the debate past simplistic or distorted applications of the Laffer curve. Please take a look at "Do Lower Tax Rates Really Increase Government Revenue?" by Alejandro Reuss (

    The idea that lower tax rates could translate into higher total tax revenue is described by the “Laffer curve.” … Therefore, he concluded, tax revenues would not keep rising with increasing tax rates. At some point, increasing tax rates would reduce total tax revenue—and diminishing tax rates would increase it.

    If we look at the historical evidence more broadly, there doesn’t seem to be much evidence that high marginal tax rates mean slow economic growth, or that low marginal tax rates mean fast growth.

    Also take a look at "Why the Left Hates the Laffer Curve" by Andrew A. Morgan (

    First, the curve is different for different types of taxation and is not the same for each income bracket. For example, the curve is not the same for the Personal Income Tax as it is for the Corporate Income Tax or for the Capital Gains Tax. The curve is not the same for the personal income tax applied to a person making $40,000 per year as it is for someone making $1,000,000 per year.

    The curves for these different taxes and tax rates will begin and end at the same place. But the area between the slope and point of diminishing return is certainly not the same. Secondly, the economic climate at any given point in time introduces countless variables such as the general economic growth rate, banking practices, loan interest rates, employment rates, consumer confidence, inflation rates and many others, all of which contribute to the shape of the curve. The curve is not the same for the same tax at different points in time because economic conditions are constantly shifting. Thirdly, it is impossible to quantitatively "measure" the relationship with any exactness because of the inherent time lag involved between changes to the tax rate and the resulting impact on government revenue. Other factors always come into play during this lag period and to some degree contribute to the resulting government revenue.