When does lowering taxes increase government revenue?
As far as I know, there are two ways to try to increase government revenue (If I’ve got this wrong, someone please correct me):
1) Raise taxes. This is pretty simple but sometimes it dampens the economy and thus creates fewer taxable transactions which leads to lower revenues.
2) Lower taxes. This stimulates the economy and leads to more taxable transactions which can lead to higher government revenues.
I’m fairly sure there is enough economics out there that I can find a bunch of theories about when one or the other is a better way to increase government revenues, but is there a good rule of thumb/observable indicator for which one would increase government revenues?
(Note: Please don’t debate IF raising government revenue is a good thing here. I know its not always the best economic policy, but I’m just trying to get a handle on this aspect).
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Economics is not an exact science. It is a lot of guesswork, There is no mutually agreed way to determine whether to raise or lower taxes; it is determined more by politics than by economics.
Lowering taxes can never directly raise revenue.
Lowering taxes, in certain circumstances, and particularly for low-income people who would spend the extra money saved, can stimulate the economy. Thus, it can lead to more employment and economic activity which, in turn, can lead to a higher pool for the government to collect revenue from.
The Laffer Curve (above) explains when this happens, and to what extent.
The idea that lowering taxes is always revenue neutral—something which every single Republican economic policy today assumes—is pure nonsense.
@laureth Thanks. I just read the intro to the Laffer Curve link. My question is this: How do we know if we are on the right side of the left side of the laffer curve?
Right side: higher taxes than optimal.
Left side: lower taxes than optimal).
@Qingu Isn’t that what I said? Anyway, this thread is about economics, not politics. I don’t want to get into political party finger pointing on this thread. For now, looking to understand how to relate theory to observable phenomena.
The ways to increase government revenue are:
1. Raise taxes.
2. Lower spending.
As I understand it, that is. I am quite sure, though.
The government spending multiplier is greater than the tax multiplier, so an increase in government spending has more of an effect on the economy as a whole than lowering taxes.
Raise them, lower them, either way we’re still fucked…
@athenasgriffin That’s not true. Lowering taxes can, in theory, raise revenue. @laureth‘s first link explains the basics of how…
If the income distribution is highly skewed toward the wealthy, as it currently is, then it makes sense to raise taxes on those with the most money. According to Keynesian economics, percentage of income that goes into the economy is much higher among the lower and middle classes than the upper class. This has certainly been true in the current instance. For all the talk about the wealthy needing money to invest in the economy, they have done precious little of it.
Robert Reich’s view
The idea that wealthy people, getting tax breaks, will reinvest the money in the economy and lead to more revenue is basically the same as trickle down economics. Or as Bush Sr. called it, “voodoo economics.”
…or, as they called it over a century ago, “horse and sparrow“economics. Give a horse enough oats and the sparrows can survive by eating horseshit (which is full of undigested oats that the horse didn’t need).
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