Thursday, December 6, 2012

Know your economics: Higher tax rates DO NOT raise tax revenues.

Most people probably do not have a great understanding of economics or economic history. However, this does not relieve voting Americans from gaining a basic education on these issues. For an easy entry into the discipline, Thomas Sowell's writings are incomparable in their simplicity and logic. Here, he explains the historical truth of why tax revenues rise even when tax rates decline. It is a simple matter of incentives and the natural reactions of human behavior. If people are faced with higher tax rates, they do not meekly comply. They actively seek other ways to reduce their tax obligation. It should be obvious that this results in lower tax revenues. 

The Democratic solution to fiscal shortfalls is to raise revenues. For some reason, Democrats fail to take into account natural human tendencies and they make the assumption that the "rich" will simply fork over more money without question. 

That revenues rise when rates decline is not just a theory. It has been demonstrated throughout history. So why don't Democrats acknowledge history, if their stated objective is to raise revenues? The answer is because raising revenues is not the true objective, it is a cover to do two things: growing government and playing the judge of morality. Democrats don't think rich people should be that rich, even though rich Democrats outnumber rich Republicans in Congress, and have higher networths overall (interestingly, more Democrats inherit wealth, whereas Republicans tend to earn theirs - this could explain why Dems do not seem to understand the value of a hard earned dollar!).

Thomas Sowell:
What both the statistical tables in the “Economic Report of the President” and the graphs in Investor’s Business Daily show is that: (1) Tax revenues went up — not down — after tax rates were cut during the Bush administration, and (2) the budget deficit declined, year after year, after the cuts in tax rates that have been blamed by Obama for increasing the deficit.
Indeed, the New York Times reported in 2006: “An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year.”
While the New York Times may not have expected this, there is nothing unprecedented about lower tax rates’ leading to higher tax revenues, despite assumptions by many in the media and elsewhere that tax rates and tax revenues automatically move in the same direction. They do not. . . .
The bottom line is that Barack Obama’s blaming increased budget deficits on the Bush tax cuts is demonstrably false. What caused the decreasing budget deficits after the Bush tax cuts to suddenly reverse and start increasing was the mortgage crisis. The deficit increased in 2008, followed by a huge increase in 2009.
The other thing Americans need to educate themselves on is the mortgage crisis. It was not caused by Bush tax cuts! Thomas Sowell explains in his book The Housing Boom and Bust"Sowell's book shows how government policies led to a huge increase in highly risky housing loans. . . . Sowell argues that while foolish decisions to indulge in complicated investment vehicles affected the specifics of how the financial contagion spread, at its root the housing problem is one of badmortgages. And those came from bad decisions by government and by borrowers themselves."

Back to Sowell's own words:
So it is sheer hogwash that “tax cuts for the rich” caused the government to lose tax revenues. The government gained tax revenues; it did not lose them. Moreover, “the rich” paid a larger amount of taxes, and a larger share of all taxes, after the tax rates were cut.
That is because people change their economic behavior when tax rates are changed, contrary to what the Congressional Budget Office and others seem to assume, and this can stimulate the economy more than a government “stimulus” has done under either Bush or Obama.
Yet there is no need to assume that Barack Obama is mistaken about the way to get the economy out of the doldrums. His top priority has always been increasing the size and scope of government. If that means sacrificing the economy or the truth, it’s no deterrent to Obama. That is why he is willing to play chicken with Republicans along the fiscal cliff. 

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