# Why do lower taxes bring in more revenue? **URL:** \ **Category:** Great Debates\ **Created:** [October 22, 2013, 1:46am UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894 "2013-10-22T01:46:59Z")\ **Posts on this page:** 20\ **Page:** 5
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [October 25, 2013, 9:07pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/81 "2013-10-25T21:07:04Z")
Oh, why do I smell a trap? The paper stands alone, and has nothing to do with whatever her personal opinion on taxes might be. For one thing, a lot of economists who would agree with this paper in general would argue that it doesn’t apply in a fiscal crisis, because the paper specifically took fiscal crises out of the mix. Second, there can be lots of reasons people might support higher taxes outside of the revenue needs of the government. For example, some people believe in using taxes to shape social or economic behavior along redistributionist, ‘social justice’, or sustainability lines. Those are all completely different arguments. Oh, one other thing: The paper notes that raising taxes to pay down the debt does not have the the same negative GDP effects. So Romer might advocate raising taxes either to shrink the budget deficit, or because she believes in more spending and thinks that raising taxes to do it is better than letting the debt increase. These are all ideological positions and have nothing to do with the basic fact that tax increases tend to lower GDP, at least during ‘normal’ economic times. ---
**Author:** ![Robot\_Arm](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/robot_arm/32/18280_2.png) [@Robot\_Arm](https://boards.straightdope.com/u/Robot_Arm)\ **Post date:** [October 25, 2013, 10:10pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/82 "2013-10-25T22:10:06Z")
> [@Sam\_Stone](#): > > So… tax increases hurt economic growth, and they do so primarily by acting as a disincentive to investment in the productive economy. This makes total sense when you consider that calculating the return on an investment has to be done by including the taxes paid on the return from your investment. The higher the tax, the more return you need to break even. I’m not sure I agree with your math on that. Taxes only apply to profits or gains. You could tax the gains on an investment at 1% or 99% and the break-even point would not change, because taxes don’t even factor into the equation until the investment has done better than break even. An investment is a calculation of risk vs. reward. Lowering the reward that an investor keeps may lower the risk he’s willing to accept. But taxing the gains won’t turn a profitable investment into a loser, unless that tax is more than 100%. Is there something I’m missing here? ---
**Author:** ![cornopean](https://avatars.discourse-cdn.com/v4/letter/c/8c91f0/32.png) [@cornopean](https://boards.straightdope.com/u/cornopean)\ **Post date:** [October 25, 2013, 10:13pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/83 "2013-10-25T22:13:24Z")
> [@Hentor\_the\_Barbarian](#): > > Please cite an instance of lower taxes leading to increased revenue. Warren Harding and Calvin Coolidge lowered taxes in the 20s and we had a massive boom. JFK lowered taxes which resulted in more tax revenue. Ronald Reagan did it. George W did it. The OK guy I referenced in the first post did it. ---
**Author:** ![Hentor\_the\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/h/8edcca/32.png) [@Hentor\_the\_Barbarian](https://boards.straightdope.com/u/Hentor_the_Barbarian)\ **Post date:** [October 25, 2013, 10:18pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/84 "2013-10-25T22:18:44Z")
> [@Sam\_Stone](#): > > Oh, why do I smell a trap? > > The paper stands alone, and has nothing to do with whatever her personal opinion on taxes might be. For one thing, a lot of economists who would agree with this paper in general would argue that it doesn’t apply in a fiscal crisis, because the paper specifically took fiscal crises out of the mix. > > Second, there can be lots of reasons people might support higher taxes outside of the revenue needs of the government. For example, some people believe in using taxes to shape social or economic behavior along redistributionist, ‘social justice’, or sustainability lines. Those are all completely different arguments. > > Oh, one other thing: The paper notes that raising taxes to pay down the debt does not have the the same negative GDP effects. So Romer might advocate raising taxes either to shrink the budget deficit, or because she believes in more spending and thinks that raising taxes to do it is better than letting the debt increase. These are all ideological positions and have nothing to do with the basic fact that tax increases tend to lower GDP, at least during ‘normal’ economic times. Well, yes, my next step was going to be quoting Romer herself on how conservatives are erroneously misrepresenting the paper. While that would be fun, I think the more important thing is to point out how you are trying to distract from this argument in doing so. This argument is not about the effect of tax increases on GDP. This argument is about the effect of tax cuts on federal revenues, and in particular whether there is any actual evidence that cutting taxes does increase revenue in reality. So rather than press on regarding the abuse of Romer and Romer, let’s keep focused instead. ---
**Author:** ![Hentor\_the\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/h/8edcca/32.png) [@Hentor\_the\_Barbarian](https://boards.straightdope.com/u/Hentor_the_Barbarian)\ **Post date:** [October 25, 2013, 10:20pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/85 "2013-10-25T22:20:39Z")
> [@cornopean](#): > > Warren Harding and Calvin Coolidge lowered taxes in the 20s and we had a massive boom. JFK lowered taxes which resulted in more tax revenue. Ronald Reagan did it. George W did it. The OK guy I referenced in the first post did it. Can you please cite evidence that cutting taxes has led to increased revenue? Do you know what “evidence” means? Do you know what “cite” means? ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [October 25, 2013, 10:36pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/86 "2013-10-25T22:36:12Z")
Coolidge and Harding were cutting taxes from a top marginal rate of 77% (and a time when the Bureau of Internal Revenue had virtually no way to enforce the tax code). > [@Farin](#): > > This DOES cloud the individual policies that might have made the changes (a new 0% individual rate and 100% business rate, for instance), but when arguing about decreasing taxes and saying it increases revenue, it’s a useful short hand to look at and see the overall tax picture in relation to revenue incoming. Thanks. I’m still not sure the premise is true, though. ---
**Author:** ![bldysabba](https://avatars.discourse-cdn.com/v4/letter/b/ecccb3/32.png) [@bldysabba](https://boards.straightdope.com/u/bldysabba)\ **Post date:** [October 25, 2013, 10:57pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/87 "2013-10-25T22:57:38Z")
> [@Robot\_Arm](#): > > I’m not sure I agree with your math on that. Taxes only apply to profits or gains. You could tax the gains on an investment at 1% or 99% and the break-even point would not change, because taxes don’t even factor into the equation until the investment has done better than break even. > > An investment is a calculation of risk vs. reward. Lowering the reward that an investor keeps may lower the risk he’s willing to accept. But taxing the gains won’t turn a profitable investment into a loser, unless that tax is more than 100%. > > Is there something I’m missing here? The mistake you’re making is assuming that any positive profit is an acceptable investment. The profit has to be positive, it has to be greater than the rate of inflation, AND it has to be higher than other available alternatives for an investment to make sense ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [October 25, 2013, 11:08pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/88 "2013-10-25T23:08:01Z")
> [@Robot\_Arm](#): > > I’m not sure I agree with your math on that. Taxes only apply to profits or gains. You could tax the gains on an investment at 1% or 99% and the break-even point would not change, because taxes don’t even factor into the equation until the investment has done better than break even. > > An investment is a calculation of risk vs. reward. Lowering the reward that an investor keeps may lower the risk he’s willing to accept. But taxing the gains won’t turn a profitable investment into a loser, unless that tax is more than 100%. > > Is there something I’m missing here? It’s not enough to have a positive return - it has to be a return high enough to justify the risk. That’s why risky investments must return more. If a zero-risk investment returns 2% on your capital, then investing in anything else must return greater than 2%. This effect is going to be greatest on very high risk investments, such as new startups. Consider a $1000 investment which will fail 90% of the time, but 10% of the time will return $9500. The before-tax expectation on this is $500. If the return is expected in a year, you’re earning 50%/yr on your investment, which may be a reasonable sum for something with a high risk of losing the entire amount. Now let’s add a tax into the mix. If your profit is taxed at 20%, then if your investment pays off you show a profit of $8500 before tax, you give the government $1700, and your after-tax profit is now $6800. However, your expectation on your original investment is now -$2200. Of course, you can ameliorate this by making lots of investments and using the capital losses on the failed ones to reduce the capital gain on the successful one - IF you make enough of those investments, and if the investment timelines are within the carryover period. That’s not always the case - especially for small investors like a relative willing to investment in your start-up business who doesn’t have a lot of other risky investments. And of course, even if the expectation remains positive, the tax might drive the return below what would be acceptable given the risk, in which case the investment still won’t be made. That’s why these kinds of effects happen ‘on the margin’. It pushes the edge cases from the point where they are barely justifiable to where they are barely unjustifiable. ---
**Author:** ![magellan01](https://avatars.discourse-cdn.com/v4/letter/m/45deac/32.png) [@magellan01](https://boards.straightdope.com/u/magellan01)\ **Post date:** [October 25, 2013, 11:26pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/89 "2013-10-25T23:26:03Z")
> [@tomndebb](#): > > From the OP: What you cited is not an instance of a republican making the claim you claim. ---
**Author:** ![magellan01](https://avatars.discourse-cdn.com/v4/letter/m/45deac/32.png) [@magellan01](https://boards.straightdope.com/u/magellan01)\ **Post date:** [October 25, 2013, 11:28pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/90 "2013-10-25T23:28:19Z")
> [@cornopean](#): > > In the video I posted, the guy from OK says that every time they cut taxes, they saw an increase in revenue. and who can forget Gibson’s take down of Obama’s nonsense: [http://taxfoundation.org/blog/obama-and-gibson-capital-gains-tax-exchange](http://taxfoundation.org/blog/obama-and-gibson-capital-gains-tax-exchange) during the 2008 campaign. > > GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, “I certainly would not go above what existed under Bill Clinton,” which was 28 percent. It’s now 15 percent. That’s almost a doubling, if you went to 28 percent. > > But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent. > > OBAMA: Right. > > GIBSON: And George Bush has taken it down to 15 percent. > > OBAMA: Right. > > GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. > > So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected? > > OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness. The Great Redistributor Speaketh! This above should be reposted on every page in this thread and threads like it. ---
**Author:** ![YogSothoth](https://avatars.discourse-cdn.com/v4/letter/y/8edcca/32.png) [@YogSothoth](https://boards.straightdope.com/u/YogSothoth)\ **Post date:** [October 25, 2013, 11:45pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/91 "2013-10-25T23:45:21Z")
> [@magellan01](#): > > The Great Redistributor Speaketh! This above should be reposted on every page in this thread and threads like it. There was a recession in the 80’s and a boom after the decade. That’s why revenues went down in the 80’s and up in the 90’s and 2000’s. :rolleyes: Taxes need to be increased, they are too low on investments. Rich people don’t need any more money and they already make exponentially more than the poor and middle class. The income gap has been widening with alarming speed since the 80’s and hasn’t stopped yet. It needs to be constricted to bring corporate profits down and the wages of the poor and middle class up ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [October 25, 2013, 11:46pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/92 "2013-10-25T23:46:34Z")
> [@](#): > > What you cited is not an instance of a republican making the claim you claim. T. W. Shannon is a Republican. ---
**Author:** ![tomndebb](https://avatars.discourse-cdn.com/v4/letter/t/b9e5f3/32.png) [@tomndebb](https://boards.straightdope.com/u/tomndebb)\ **Post date:** [October 26, 2013, 12:28am UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/93 "2013-10-26T00:28:16Z")
> [@magellan01](#): > > What you cited is not an instance of a republican making the claim you claim. Yes it is. ---
**Author:** ![Robot\_Arm](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/robot_arm/32/18280_2.png) [@Robot\_Arm](https://boards.straightdope.com/u/Robot_Arm)\ **Post date:** [October 26, 2013, 1:23am UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/94 "2013-10-26T01:23:22Z")
> [@bldysabba](#): > > The mistake you’re making is assuming that any positive profit is an acceptable investment. The profit has to be positive, it has to be greater than the rate of inflation, AND it has to be higher than other available alternatives for an investment to make sense > [@Sam\_Stone](#): > > It’s not enough to have a positive return - it has to be a return high enough to justify the risk. That’s why risky investments must return more. > > If a zero-risk investment returns 2% on your capital, then investing in anything else must return greater than 2%. Both are correct, but have nothing to do with what I objected to in **Sam** ’s earlier post. I already mentioned the risk vs. reward. I just thought it was misleading to say that higher taxes make it harder for an investment to break even. If it lost value, it’s lost, and the tax rate doesn’t even matter. If it made money, you’ll give up some of the gain, but never so much as to push you back into the red. > [@](#): > > This effect is going to be greatest on very high risk investments, such as new startups. Consider a $1000 investment which will fail 90% of the time, but 10% of the time will return $9500. The before-tax expectation on this is $500. If the return is expected in a year, you’re earning 50%/yr on your investment, which may be a reasonable sum for something with a high risk of losing the entire amount. > > Now let’s add a tax into the mix. If your profit is taxed at 20%, then if your investment pays off you show a profit of $8500 before tax, you give the government $1700, and your after-tax profit is now $6800. However, your expectation on your original investment is now -$2200. I think you lost $1000 somewhere in there. If the investment pays off, it’s $9500 before tax. Tax is $1900, after-tax profit if $7600, expectation is -$1400. All of which assumes a level of certainty that I don’t think anyone ever really has. ---
**Author:** ![cornopean](https://avatars.discourse-cdn.com/v4/letter/c/8c91f0/32.png) [@cornopean](https://boards.straightdope.com/u/cornopean)\ **Post date:** [October 26, 2013, 1:33am UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/95 "2013-10-26T01:33:04Z")
> [@Hentor\_the\_Barbarian](#): > > Can you please cite evidence that cutting taxes has led to increased revenue? Do you know what “evidence” means? Do you know what “cite” means? apologies. this is from the original work of Laffer himself. there is a copy of it here: [The Laffer Curve: Past, Present, and Future | The Heritage Foundation](http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-future) ---
**Author:** ![cornopean](https://avatars.discourse-cdn.com/v4/letter/c/8c91f0/32.png) [@cornopean](https://boards.straightdope.com/u/cornopean)\ **Post date:** [October 26, 2013, 1:36am UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/96 "2013-10-26T01:36:24Z")
> [@YogSosoth](#): > > There was a recession in the 80’s and a boom after the decade. That’s why revenues went down in the 80’s and up in the 90’s and 2000’s. :rolleyes: > > Taxes need to be increased, they are too low on investments. Rich people don’t need any more money and they already make exponentially more than the poor and middle class. The income gap has been widening with alarming speed since the 80’s and hasn’t stopped yet. It needs to be constricted to bring corporate profits down and the wages of the poor and middle class up This shows a fundamental misunderstanding of how wealth is created. There is not a fixed amount of wealth that is then divvied up amongst people. Wealth is created by entrepreneurs who start businesses and create things that we want. To say that rich people don’t need any more money is absurd. The fact is that rich people create this wealth and are therefore entitled to it. the really amazing thing about this is that they enrich many others by their greed for more. The richer they get, the richer we all get. ---
**Author:** ![running\_coach](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/running_coach/32/15836_2.png) [@running\_coach](https://boards.straightdope.com/u/running_coach)\ **Post date:** [October 26, 2013, 1:46am UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/97 "2013-10-26T01:46:24Z")
> [@cornopean](#): > > This shows a fundamental misunderstanding of how wealth is created. There is not a fixed amount of wealth that is then divvied up amongst people. Wealth is created by entrepreneurs who start businesses and create things that we want. To say that rich people don’t need any more money is absurd. The fact is that rich people create this wealth and are therefore entitled to it. the really amazing thing about this is that they enrich many others by their greed for more. The richer they get, the richer we all get. Walmart. ---
**Author:** ![Farin](https://avatars.discourse-cdn.com/v4/letter/f/e79b87/32.png) [@Farin](https://boards.straightdope.com/u/Farin)\ **Post date:** [October 26, 2013, 12:55pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/98 "2013-10-26T12:55:12Z")
> [@cornopean](#): > > This shows a fundamental misunderstanding of how wealth is created. There is not a fixed amount of wealth that is then divvied up amongst people. Wealth is created by entrepreneurs who start businesses and create things that we want. To say that rich people don’t need any more money is absurd. The fact is that rich people create this wealth and are therefore entitled to it. the really amazing thing about this is that they enrich many others by their greed for more. The richer they get, the richer we all get. > [@runner pat](#): > > Walmart. Cornopean, what you say is true. To a point. As **Runner Pay** helpfully pointed out the opposite of your assertion is very much the reality. Why is that? Because businesses have been restricted from doing anything that doesn’t address the interests of the shareholders (and that interest is “money”). It’s in the shareholder interest for employees to make 12 cents an hour and not $22/hour. Look at a place like CostCo. The shareholders, every single year, ask them to drop the wages of their employees to boost profits (and hence shareholder payouts). I suspect that as long as CostCo is giving a decent return, they won’t take action. But a few bad quarters and I expect the sitting CEO/Board to be voted off the island and replaced by someone who would love nothing more than to bend to the wants of the shareholders. Greed, cornopean, is what’s destroying the middle class and driving a huge gap between “Rich” and “Serf”. There is a lot we could do to temper this and make capitalism work, again, but unfortunately the “Rich” has a lot of interest in keeping things the way they are so they get richer. ---
**Author:** ![magellan01](https://avatars.discourse-cdn.com/v4/letter/m/45deac/32.png) [@magellan01](https://boards.straightdope.com/u/magellan01)\ **Post date:** [October 26, 2013, 4:42pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/99 "2013-10-26T16:42:41Z")
> [@tomndebb](#): > > Yes it is. Nope. Your logic is wanting. Let’s recap: [QUOTE=cornopean] No con or libertarian has ever argued that tax cuts always brings in more tax revenue. [/QUOTE] [QUOTE=tomndebb] From the OP: > [@](#): > > The speaker of the house from OK says that every time they lower taxes, they end up collecting more tax revenue [/QUOTE] [QUOTE=me] What you cited is not an instance of a republican making the claim you claim. [/QUOTE] [QUOTE=tomndebb] Yes it is. [/QUOTE] No, it’s not. And here’s why. The Shannon quote you supplied as _proof_ is talking about 1) the very limited experience _within Oklahoma_, as seen from 2) their past experience, and 3) makes zero claim about tax cuts generally and always resulting in increased revenues. ---
**Author:** ![magellan01](https://avatars.discourse-cdn.com/v4/letter/m/45deac/32.png) [@magellan01](https://boards.straightdope.com/u/magellan01)\ **Post date:** [October 26, 2013, 4:43pm UTC](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894/100 "2013-10-26T16:43:43Z")
> [@Really\_Not\_All\_That\_Bright](#): > > T. W. Shannon is a Republican. See my post to **tomndebb**. [Previous page](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894.md?page=4) [Next page](https://boards.straightdope.com/t/why-do-lower-taxes-bring-in-more-revenue/671894.md?page=6)