HOW Does Lowering Taxes Increase Revenue

Great Debates
81

Maybe I don’t understand your objection, but the tax rate is one of the factors going into the cost-benefit analysis.

IOW, taking all the factors into consideration, a $20K raise in take home pay is not enough to take the new job. A $22K would be enough. A tax cut that reduce the tax burden by $2K would therefore cause him to take the new job rather than decline.

I suppose the government could do other things to change the equation as well, like build new roads and so forth. But we are talking about taxes.

Besides, under current conditions, most of the things that the federal government spends most of its money on go to people who either don’t work, or don’t pay income taxes. Most of the federal budget goes to Medicare, Medicaid, Social Security, defense, and interest on the debt. Most of that is spent on Medicare and Social Security goes to people who are retired. Medicaid is for people who don’t work, or who don’t pay very much in income taxes. We all benefit from defense spending more or less equally, and likewise benefit (so to speak) by paying the interest on the debt, so it is difficult to argue a variable benefit from paying more in taxes for those two purposes.

It is thus more likely that a tax increase will be spent on purposes that do not directly benefit the taxpayer. This is not necessarily an argument that we cannot do it, but it is a factor to be dealt with in any cost-benefit analysis. Should I be allowed to keep the $10K and buy a used car for my son, or have it taxed away and given to my great-uncle Marvin to pay for his blood pressure medication? Keeping in mind that the used car allows my son to get to school so he can learn to be an engineer, whereas Marvin is living mostly off his Social Security.

Regards,
Shodan

82

My Butcher had a sale on New York Strip steaks last week, $6.99 a pound. I stocked up. Now that the price is back to $9.99 a pound. Should I whine about how I’m being cheated? It seems that’s your intent with respect to Bush’s LIMITED TERM tax cuts. If the GOP had wanted them to be forever, they should’ve gone for that when they had the power to do so. If these cuts make long term sense, why did they sunset them? I suspect it’s because even the tax cut addicted GOP knew that these cuts were too extreme to maintain. The current party seems to have forgotten that.

83

No, not at all. I don’t recall anyone claiming they were cheated.

When the price went from $6.99 to $9.99, was that a price cut, a price increase, or did it stay the same?

You also mentioned that you stocked up. IOW, the total amount of profit the butcher made from you was greater last week than it is now. This is a demonstration of how tax cuts can increase revenue. If the butcher sold a hundred steaks at a dollar profit each, he is better off than if he sold twenty steaks at four dollars profit each.

Regards,
Shodan

84

Or, as everyone stocked up last week, no one will need steaks this week, or next week, or the week after. So he sold 100 steaks at one dollar profit (all at once), rather than say, 80 steaks at four dollars profit each (over a month).

85

My point is that there are a bunch of assumptions built in to his analysis that are affected one way or another by the use to which taxes are put. Take defense. A large chunk of that goes to the U.S. Navy. Without that Navy, how much less safe would the high seas be? How much more would it cost to ship petroleum to the U.S.? If his longer commute meant 30 extra miles a day it might mean 250 extra gallons a year. At 3 dollars a gallon that is only $750 more a year. At $15 a gallon that is $3750 more a year. Then if he had to pay an extra 20 dollars for tolls on private roads, now he is up to $8750. And counting SS and Medicare, which you seem to be doing, now you may have to consider how to support your parents as well. Does his current job provide long term care insurance for relatives? Does the new one? How much do they cost, if they exist? All these things and more are hidden assumptions in his analysis.

There are hundreds of things a functional government does for us. And many of them may not be affected by a 2% tax cut, but if 2% is ok, why not 5%? What is the point where less services start impacting the economy more than more take home money? I don’t know, and doubt if anyone else does either.

86

You assume a lot here. You assume that he is still making a profit at $6.99 instead or maybe he got to big an order and is just trying to take a smaller loss, or he is trying to get you in the store with a loss leader. But just like with taxes, it depends on why the cut happens and how to determine if it will work. You could have enough people just buy the steaks so that it is a net loss. Too many unknowns to know for sure.

87

What, you wanted me to list everything that went into my calculation? Who cares? One reason is enough to get the point across. As for how sure I am…pretty damn sure, considering they asked me “How much would it take to get you to leave your current job?”

And the tax rate is in my personal cost/benefit analysis. So whether I take the job or not is a direct consequence of the tax rate. The OP asked how lower taxes could increase revenue. I’m producing $94,000 worth of work right now. If the tax rate were lower, I could produce $125,000 worth of work. That’s how.

I have no idea. I don’t know A or B. Need more info. Where are you going with this?

88

If the tax rate was lower, but you had to pay road tolls on private roads you may not take the job. If the tax rate was lower but you were less sure of this company staying in business and there was no unemployment insurance, you may not take the job. If the tax rate was lower and gas cost ten times what it does now, you may not take the job. If the tax rate was lower, etc.

The point is you are trying to hold all else as equal except the tax rate when how the taxes are used could also change your answer. Basically all you can say for sure is under the current conditions, with the taxes and government services that currently exist, the job is not worth it to you.

89

Why do you assume that lower taxes would mean the end of public roads, unemployment insurance, and the U.S. Navy which keeps petroleum prices low?

This seems to be the fall back argument for pro-government spending types: That any tax cuts will cripple essential services instead of cutting wasteful entitlement programs.

90

You guys slipped into micro economics on a macro economic question. Does cutting taxes lower the revenue the government gets. Of course it does.
The only defense that can be offered is that a lot of new jobs will be created and the government will
eventually collect more through payroll taxes. Tax cuts have never been followed with a hiring boom. It is a fallacy. But our taxes of late have been concentrated in the upper classes. There has not been a hiring boom in case you have not noticed. That is typical after a tax cut.

91

Well, aside from the 100% tax example which shows at least ONE situation where tax cuts can increase revenue (and frankly I don’t think the laffer curve starts sloping downwards until you hit something like 80%), you might want to familiarize yourself with marginal utility of leisure/wealth. At some point you won’t work that second shift if the marginal tax rate is high enough and that might happen enough to actually lower the total taxes collected.

92

Probably because we NEVER cut entitlement programs because of lack of money.

Starving the beast has never led to successful entitlement reform. You can’t back politicians into a fiscal corner to force entitlement reform. You need a collective political will to do it. Look at what happened when the Democrats cut waste in medicare part C. They were crucified over it and make no mistake, a lot of the anger over the health care bill is those cuts in medicare part C.

So the money always comes from somewhere else and that somewhere else frequently comes in the form of deferred maintenance, and lower social services.

93

Well, at least in the first year there WILL be lower tax revenue. That needs to be accompanied by lower spending. Otherwise it goes back to what I was saying before, “lower taxes is just another form of deficit spending.”

The other reason for saying this is that the anti-government side seems to imply that a person gets nothing for their taxes. Sam Stone’s example talks about a person not buying/selling widgets when the tax rate gets too high. A later example talked about a person not taking a higher paying job.

The higher tax rate means more services. A person self employed has to provide for their own health insurance, but switching to a larger company might mean a cheaper group plan.

But have a tax rate that provides universal health care, and that part of the decision is removed from the equation.

Higher taxes might also mean public highways instead of toll roads.

That’s why I said the money is still there in some form. The money government collects gets spent on things.

94

Yes, but it’s disconnected from the decisions that cause deadweight loss. Remember, in the example I posted on widgets, I accepted for the sake of argument that the government WILL inject all that money back into the little micro economy with perfect efficiency. There was still a $30 loss.

95

Actually, this is a terrible example. In this scenario, it’s reasonably clear that someone else would take the job offering $125k. Shoot, even if you did take the job, odds are that whomever employs you now would hire someone to replace you.

Your turning down this job offer means virtually nothing to Uncle Sam, and it has no larger significance to anyone but yourself. ETA: Sam Stone’s explanations on the impact of taxation on the economy and government revenues are a much better example of how tax rates impact the world around us. What you choose to do with your time, and how you value money vs. job perks isn’t a useful point in discussing taxation.

96

Starving the beast has never been done like this. The repubs have every intention of cutting every program they can that does not help the rich. It was difficult to justify cutting programs for the poor when we had full employment and a budget surplus. They knew how to fix that and they did. Now the argument has more of a basis, unless you realize going back to the pre Bush or earlier tax levels should be done.

97

Sorry, I didn’t really complete my thought:

With your widget example, the taxes took $X from each transaction. That money gets spent, and like you said, could be given right back. What I feel is missing then from the addition of “a tax” is that there needs to be a corresponding “set of costs” for each player.

If the government is taking that money, and spending it, there should be a benefit. Which means those were costs that were already there. Each person might have $30 in medical expenses, or they could pay $30 to a UHC plan. If the government is spending it on something, they would have had to spend it themselves without the government. At least at the start, government is using taxes to provide a service, with the goal of making the situation better.

If you start with the assumption that government money is wasted, that no one benefits, that individuals are better off spending it themselves, that’s fine. But it should be acknowledged and not just implied.

There are all kinds of other cheesy examples: the $30 means public schools, police, fire, roads, snow removal, garbage collection. All things that without taxes means each person pays out of pocket.

A more direct example might be things like, a federal widget inspection system that makes sure widgets are up to code, safe, not painted with lead, actual widgets from widgeland instead of cheap knockoffs from China. This is the anarchy side of the free market, a dog eat dog world that is harsh and unforgiving.

Instead of taxes, what if there was a $20 commission on each sale. Money is taken out of each transaction and seems like “deadweight loss.” I know commissions impact how and when I made stock trades. But those commissions go towards something. It means that there is a market place, with rules and structure that allows the transaction to occur. I might value BP stock right now, but it would take me a week to call around and find someone that wants to sell it for the same price I want to buy it. Instead I pay commissions to have a broker and a market that puts all of that at my finger tips.

If we ignore taxes for a second, Ebay and Paypal take a cut from each sale, which is a tax. But it also provides a service. So those widget guys might each have to spend time, resources, effort, and money finding each other. And then for each 4 widgets traded, 1 of them might have been a fraud. Craigslist is free, but scary as hell.

The point I’d like to address after all of this is: what happens to your widget example if each person has a $20 cost associated with each transaction. A tax is then a substitution for that cost.

98

My last message was pretty garbled, I’m better hydrated, allow me to try again:

We had the widget example, and then we added a $30 tax. It was clear that with the tax, deadweight loss cost the government revenue, even when the money was given back.

First, if there was a a $30 rebate after paying the $30 tax, wouldn’t people factor that in, and therefor carry on with the transaction? I paid a bunch of fees to buy a house, but also got an $8000 credit, that encouraged me to buy.

Why would they stop a transaction if they’re getting the $30 back later?

Crap, I gotta go…

99

The point is that unless lowering taxes magically causes instant revenue increases, if you lower taxes you must either increase debt, or reduce what a government does. Some of those things that government does affect your decision. Even some entitlement programs. As I said before, without unemployment insurance the safety of your job is a bigger factor. Without medicare and SS, caring for your parents may become a factor. Without welfare programs, homeless people and social unrest may become a factor. How big are these factors? I have no idea. Could we reduce spending by making them more efficient? Sure, let’s do that. But the fact is that we will have some level of taxes and some level of government services and both of those could affect your decision.

What you are missing is that there are some things that the government can do better than private markets. Roads, regulations, general security, etc. Those things can also cause deadweight loss. What if the best yo could do locally for your widget was break even, but if you can ship it overseas cheaply (thanks to no high seas pirating, cheap oil, and good foreign relations/trade agreements) and sell it for $140 with $5 dollars to cover the shipping? Now government spending has averted deadweight loss. In this case you receive more in value than you give in. This is neither always nor never the case. Which is more common. I have no idea. I doubt anyone does. But I also don’t see how a 3% change at our current level is going to tilt things one way or the other.

100

You take it for granted that someone else will get the job instead of me. That’s not really true in all scenarios. Companies bid on contracts all the time, whether they’re building houses or cleaning apartments. If they can’t hire people, i.e. entice them to switch jobs, then the contract doesn’t just go to someone else. In many cases, it doesn’t get done at all. The house never gets built. The microchip never gets designed. The garbage man is stuck with the old, inefficient truck.

If your argument were true, then there would never be any growth in the economy. In order to show growth, someone has to take $1 in nails and $1 in wood and make a $3 chair. In my analogous case, I would take $94,000 worth of work and instead provide $125,000 worth of work with it.

It doesn’t matter if you can look at my specific, real world scenario and say that someone else will get the job. If you accept that someone, somewhere is growing the economy by making 1+1=3, then you accept that taxation can erase that motivation.