The economy grew like an SOB in the pre-Reagan 60’s when theupper income tax rates were minimally 70%. Claims that the current rates, or even the pre-Bush taxcut rates are high enough to decrease potential revenue are absurd. We’ve had rates upwards of 90%, yet the economy still grows.
Because you quoted me in the OP from the other thread, and what I was talking about there was the high tax rates post WWII and kept high until after the 80’s. Your 35% is a strawman, at least as far as I’m concerned…no one was saying in the other thread (that I saw anyway) that dropping the current tax rate would have the same sort of effect. In fact, I specifically said that I didn’t think it WOULD have that effect today.
It’s ‘People won’t work harder for nothing’. I don’t see why this is so hard for you to grasp, to be honest. I’m not going to work harder to build a business if by being successful it just means I’m paying more in taxes. Would YOU want to work harder so that your success is simply measured in how much more you pay to the government? Even if your answer is ‘yes’, do you really, honestly believe that most people think that way??
That’s the crux. Trying to find an optimal level where people are willing to pay all or at least most of what you are taxing them (instead of expending the effort to find ways around what you are doing or simply not working harder), and not dragging down the economy by over taxing and stifling growth. I’d say that the optimal level is pretty close to what the tax rate has hovered around for the last decade…something like 38-42% at the highest level, give or take a few percent. I don’t have anything but my own uninformed opinion for that, btw…just my economically uneducated guess. It SEEMS like it’s been a pretty good balance between revenue (if the government could actually stick to a hard budget) and growth.
The thing is, that the rate is going to change…it’s not a hard and fast rule. Sometimes it will make sense to tweak it up or down, depending on economic circumstances.
But your thought experiment doesn’t really say anything. That’s why people are trying to explain what you are seemingly asking by giving numbers that will demonstrate the basic concepts. The numbers you give might or might not actually DO anything, since there are all sorts of other, more advanced concepts involved that are probably beyond everyone participating in this thread, whereas the counter examples given touch on what you are seemingly wanting to understand. Where that optimal level would be (and as I said, it’s not a hard, fast level) is debatable, and complex.
-XT
It grew because the US had an almost complete monopoly on industrial output during those times, due to the effects post-WWII and a lot of Cold War era factors. Once those factors started to change our economy certainly didn’t still continue to grow…at least, not until after we changed those upper tax rates from 90+% down to more manageable figures.
But then, you knew all that, and yet posted the above. Curious.
-XT
Oh, I agree with you. Based on historical data, I think we’re currently WAY below the sweet spot for maximum revenue. I was just trying to explain the general principle.
Th disconnect here is outside of the extremes (0% or 100%) lower taxes only increases revenues in a few cases. In a graduated income tax system with a high enough top margin there may be a point where increased work is no longer is worth it.
If I may modify your example a little: Say your guy is making $2mil and paying an average tax rate of 35%, but any income above $2mil is going to be taxed at 85%. Say he is offered a chairmanship of a board of directors for an extra $500k a year. The job requires about ten hours a week of meetings and other duties. Assuming he is currently working 40 hours a week, then 500k for 10 hours makes sense for him financially if he pays the same amount of taxes as his average (35%), but makes no sense if he has to pay 85%. His net take home from his normal job is $625/hour, from the chairmanship it is only $144/hour. This sound like a lot, but I know unless I really needed the money, I would not take a second job where I take home less than a fourth as much per hour. Theoretically, in this situation, the government lost $175k in revenue if the tax rate was only 35%.
This is almost never a real issue in the U.S. because we are almost never in a position where the utility of labor goes down so much. Usually you are only going to see the utility go down by a few percentage points, like if you were earning $50k and could make another $20k your average at $50k would about 22% and yo pay 25% for extra $20k. If it would be worth to do the extra work for $15.6k, it would probably be worth it for $15k, too.
And you also had more tax avoidance (legal) back then which results in no additional overall revenue. You have the 90% figure in your head but what you don’t have is all the 1000 pages of tax code exceptions and deductions in that enabled people to get around it.
For a counter-intuitive look at how historical tax rate increases don’t match up with tax revenue increases: Hauser's law - Wikipedia
(Please note that Zubin Jelveh has issues with the analysis for corporate taxes but agrees with the observation of personal income taxes.)
The idea that higher taxes motivate people to earn less rests on pretty flimsy logic. Taxes are essentially an expense like any other. Why should people react to them differently than they do to other expenses?
If the rent on my apartment is raised from $800 a month to $1000 a month, do I react by working less? No, I’ll probably work more in order to earn extra income to compensate for the added expense.
Same thing with taxes. Let’s say I’m earning $100,000 a year and paying $40,000 in taxes. Then my taxes get raised to $50,000. What do I do?
- Work harder and earn $120,000 a year so my post-tax income stays at $60,000.
- Work the same and adjust to a post-tax income of $50,000.
- Let my income decline to $70,000 so my post tax income falls to $35,000.
I can see people reacting with choices 1 and 2, but who would go with choice 3?
I’m interested to see how you explain the economy’s performance after the Bush tax cuts.
At least accept my apology. I’m not trying to set up a strawman. The basic idea that raising taxes means more revenue as I said is more intuitive. Like that study Bricker posted, higher taxes means the government takes more money.
I’m trying to get people to explain the counter to that. The extremes of 0% and 100% are also very obvious, it’s the in between part that I’d like to hear the proposal for.
Again, it is obvious that a person won’t work harder if all their extra income goes to taxes. That’s the 100% scenario. Anything lower means that if they work harder, they’ll pay a bit more in taxes and ALSO get some more income. If I want more things, I’ll try to earn more income. I think that’s pretty universal.
Isn’t the fact that there are millionaires in American proof that people will continue to try to make more money?
Now, this is what I expected, which is why I frequently ask if we’re talking about the marginal income tax.
Thank you Strassia that was the answer I was looking for.
You’d think so, yet here we are into the lowest third of what all agree must be a convex curve, and people insist that the slope is negative down here.
People want stuff, be that stuff a new swimming pool, a carton of cigarettes, or dominance in the field of social networking applications. If taxes go up, they’ll still want the pool, they’ll sell their daughters into slavery in order to buy cigarettes, and they’ll still want their networking company to be the bestest biggest social-networking dealy in the world. Those wants drive the curve towards a positive slope at a given value of taxation. This is not minor effect. IMHO, it certainly overpowers the absurdly rational notion that workers will ‘do the math’ and slack off to some given level of effort vs reward. We are not a nation of instinctual math doers.
Let’s look at some actual numbers to see how effectively tax cuts increase tax revenues. Here are the CBO numbers for US tax revenue over the last few decades. These numbers are all in billions of dollars, so 192.8 is $192.8 billion. OK, here’s total government revenue for the last few decades. In the fifties and sixties tax revenue almost exactly doubled every ten years, just the CBO link doesn’t have the numbers handy :
1970
192.8
1980
517.1
In the 1970s revenues almost tripled due to massive inflation caused by two massive oil price spikes. The 1980s saw revenue double again with the help of inflation and the Reagan Tax Increases though as a counterweight the Reagan Tax Cuts caused revenue to fall.
The 1990s saw things on trend too, with tax revenues doubling even though inflation was now under control :
1990
1,032.1
1991
1055.1
1992
1,091.3
1993
1154.5
1994
1,258.7
1995
1,351.9
1996
1,453.2
1997
1579.4
1998
1,722.0
1999
1,827.6
2000
2,025.5
Bush took office in 2001 and enacted tax cuts which were backdated to the start of that financial year. If the Laffer curve is correct then tax revenues should be on target to roughly double plus we see some of that Laffer increase on top of the doubling, right? After all, in 2000 a prez who inherited a budget surplus put in place the most far-reaching and radical supply-side deregulationist policies ever seen in America, at least since 1929. If supply-side theory is right and tax cuts/deregulation produce massive economic growth/increased revenues then we should expect revenues to really surge, right? Here are the numbers, again in hundreds of billions$ :
2000: 2025.5
Bush tax cut
2001 : 1991.4
2002 : 1853.4
Bush tax cut
2003 : 1782.5
2004 : 1880.3
2005 : 2153.9
2006 : 2407.3
2007 : 2568.2
The 2008 number isn’t on the document but it’ll obviously be below the 2007 number due to the recession, financial meltdown etc.
http://docs.google.com/viewer?a=v&q=cache:wb6jwq--MYYJ:www.cbo.gov/budget/data/historical.pdf+cbo+historical+tax+reenue+data&hl=en&gl=uk&pid=bl&srcid=ADGEESiQ7VPzWTcfABGbE8URp8bDQbtBsMSk5C0GECzmmKMHIXyylljKjVfumYo0PgTkopW25B6qIk16Y85BTBjcfGsh_-H7ved11azcUDPpPkLIukYexeDUvHsmpDGN_Wfu3EHOTRgT&sig=AHIEtbTh_Q_aH_XxBY4tjUPYst59xaCIgw
Here are just the income tax numbers :
1970 $90.4 billion
1980 $244.1
1990 $466.9
2000 $1004.5
2007 $1163.5
Yeah. And average yearly economic growth (GDP) by prez :
Carter : 3.4%
Reagan : 3.5%
Bush 41 : 2.1%
Clinton : 3.6%
Bush 43 : 1.9%
Well, there are choices 4 and 5…4 find new and interesting ways to shelter the income, or other ways to be paid besides more income, and 5 not bother expanding the business or finding new investments, at least not without going back to 4 first and finding ways to do so that won’t incur more taxes. The bottom line is you might RAISE the taxes by your theoretical 10%, but you don’t seriously believe you’ll actually GET that extra 10%…do you?
Looking at the chart in your link, I’d say that the dip was due to the dot com bubble bust, and that things started to recover after we shook the dust of that recession off our collective boots (well, before the next crash hit us with the housing bust). I don’t know what effect Bush’s tax cut had, or how much of an effect there was (my gut feeling is that it had a short term stimulating effect and perhaps shortened the recession, but that overall the effect was minor). Since I wasn’t really talking about tax cuts in that range (and I’ll note that income taxes steadily climbed back to pre-Bush levels by the end of his term), I’m probably not the person to ask your question of.
But they aren’t going to work substantially harder for diminishing returns either. If I’m going to invest my money, for instance, there is some risk in that (same if I’m going to expand my business). It MIGHT work out…but then again, it might not. If I’m going to do this, then I’m probably not going to want to take that risk for a few extra percentage points. Why would I if the return isn’t worth the risk?
You don’t have to get into 100% range to see this. If I’m risking a million dollars, but you are taxing me such that even if I double my return I only get $100k, then it wouldn’t seem like a wise course. Instead, I’ll just hold onto that $1 million and pay the taxes on it…that way I’m at least assured of having the million.
What will REALLY happen at the higher tax levels, however, is that people will simply find ways around the taxes after a while. Or they will be compensated in something other than money that isn’t taxed. Or they will move to some place else and take their money with them.
At least that’s how I see it. Obviously I’m neither an economics major nor an expert on taxation and it’s effects on revenue. That’s my understanding of truth…YMMV. To me, it seems obvious that there are instances where lowering taxes can certainly increase revenue. Though I’m not sure what MOIDALIZE was trying to demonstrate in his link, to me it demonstrates this point. The tax rate in '64 was high (over 90% at the top)…it was below 30% in the 80’s and climbed back to no more than 40 some odd percent even today. And yet tax income certainly has more than doubled in that time frame. Is it all because of lower taxes? I have no idea…but I think it’s certainly a factor.
Does that mean that all tax cuts are good, or that tax cuts are a panacea for all ills? Of course not. As with tax increases, tax cuts are only effective sometimes. I think that there is an optimal level (a ‘sweet spot’ as another poster put it) where you get the most revenue AND the best environment for investment and economic growth. Obviously, considering my own world view, I think that such a sweet spot is at a relatively low tax rate. What tax rate? I’d say that the best evidence is something like the rate we had in the 90’s, since that was, in my uninformed opinion, the single greatest economic expansion in US history. But the rate isn’t cast in concrete…it needs to float up or down, depending on the state of the economy. I just don’t think it needs to float up or down a lot.
-XT
The main thing to take from that chart is that federal tax revenues climbed only slightly from 2000 to 2008; growth was nearly flat over that time period.
Compare that to the growth in tax revenues from 1990 to 2000. The growth trend exhibited in this period flattened out over the subsequent decade, despite low taxes.
Lest anyone be confused by this post, this is not how income tax works in the US (I used to think so until an embarrassingly late age of ~14). Only the last $1 would be taxed at 33%. The rest of the income is taxed at the lower rate(s).
Here are some anecdotes and thought experiments that address the OP. I’m not arguing that we are past the peak on the curve, just that tax rates do factor into our decisions.
A family member of mine once turned down a job offer that paid more because it just wasn’t worth the extra work. If taxes had been lower, it might have been worth his while.
After a rather complicated year (job switching, sale of stock options, etc.), we hired a tax expert to make sure we took advantage of every loophole and benefit possible. His work cost us quite a bit, but we ended up saving a considerable amount in the long run. Had the tax rates been lower, paying him wouldn’t have been worth the expense and the feds would have received more money. Paying $500 to save $1000 in taxes is worth it. Paying the same to save $500 is not, so the feds get their cut. This was an unusual year for us, but some wealthy folks regularly have unusual (to me) income streams.
Another relative is nearing retirement. The expected difference between his gross pay now and what is expected after retirement is large. However, the difference in net pay is smaller due to the higher marginal tax rates. The following numbers are hypothetical and only consider federal income tax and use the 2010 brackets as I understand them. If he’s getting paid $82,400, that’s $65,619 after taxes. His expected retirement income is $34,000, or $29,319 after tax. Working a year longer than he had planned is tempting because he would have more saved up. But he won’t get an extra $48,400. Instead, working an extra year will only give him an extra $36,300 to add to his savings.
I picked the most extreme bracket range here, and even then an extra $36k in the bank is nothing to sneeze at, but what if it’s only an extra $20k? $10k? At some point you just say screw it and retire.
Say some company in NYC wants to hire me for my amazing chemistry skills. They offer me much more than I’m getting paid now, partially due to the high cost of living and increased local taxes there. A lower federal tax rate means that I get to keep more of my money, which means I am more likely to break even or have additional disposable income if I make the move. A higher tax rate means they have to pay me a shit-ton in order to make it worth my while.
Well, sure. Look at the rather large dip that happened in 2000 and 2003. We hit a major pot hole there. Recession. Dot com bust and a partial melt down of the IT tech industry, with the resultant downsizing of that entire industry. 9/11 and the body blow that gave to the US, including our economy. Two large scale wars and the resultant further drain.
Despite that, we DID grow from 2000. And we did that without taking taxes up at the end to much above where they started in 2000.
Yeah, but you are comparing apples to oranges. You are talking about the difference between a time of huge economic expansion in the US, then contrasting that to a time after we had a major economic bust and a nasty recession, coupled with that 9/11 thingy and two wars. I don’t think the tax rate was all that much of a factor…and, again, I never said tax cuts are a panacea solution or silver bullet, nor that the Bush tax cuts were necessary or really all that helpful.
-XT
What does 9/11 and two wars have to do with the growth trend in federal tax revenues?
Seriously? It had a huge impact on business and was certainly a contributing factor in how deep the recession went. Less business revenue, less expansion mean less jobs…which all translate into less revenue to the government. The wars had similar effect, both psychological and economic.
-XT
Well…why don’t you name some of these “huge” effects. Did the terrorists carpet bomb an entire industrial area? Did they murder a significant number of our workers? Did it bum out the entire country to the point that everyone stopped going to work? What happened?
Leaving aside tens billions of dollars in damage, the hit to critical infrastructure in NY and the other obvious direct effects, there were the psychological effects. People were scared. They bought less. Businesses reacted in a similar fashion…they expanded less, they pulled in on themselves. Both those factors alone translated into less revenue for the government. If people don’t buy goods and services then companies don’t make as much money. If that happens then they hire less people. Less people and less revenue for business translates into less tax revenue for the government.
:rolleyes: Has anyone carpet bombed the country lately? If not, well, why are we in a recession NOW? Do you figure we have to be directly attacked for the economy to take a nose dive or something?
Sort of hard for me to take you seriously after the above. What do YOU think happened? Was it the tax rate being lowered that sent us into a recession? Do you figure that 9/11 had zero effect on the economy?
-XT