Does cutting taxes really increase revenues?

Question

I've always thought that taxes were a source of revenue, yet I see people on YA constantly claiming that revenues go up when taxes go down. Where do they get this idea? Is it true in one particular case, and they're trying to claim it applies in others? And if it is generally true, up to what point? Surely the government couldn't abolish taxes entirely, or even distribute money by means of a rebate, and still increase revenues?

Answer 1

It increases revenues, but NEVER enough to cover the shortfall. It's the Laffer Curve, which is pure crackpottery and used to justify reverse redistribution for the rich. It was tried during the Reagan Administration and led to huge deficits. It was tried again by Bush and made even bigger deficits. May we never be so foolish as to try it again. Pay as you go!

Answer 2

It is possible for that to be the effect.
Consider a society that has a tax rate of zero. The government would recieve no money from taxes.
If the society had a tax rate of 100% similarly the government would recieve no revenue as people would either refuse to work or would try to hide thier income.
But in between these two extremes the government does make some revenue.
Logically then the curve showing the relationship between tax rates and revenue must slope upwards from zero as tax rates rise - up to a maximum point, and then slope downwards back to zero at 100%.
Nobody denies this. What is a point of contention is where we will find this maximum revenue point.
Kennedy cut maximum personal income tax rates from 95% and did in fact see a rise in revenues as top earners declared higher earnings and these were taxed accordingly.
Reagan and Bush both did the same (as well as cutting capital gains tax rates) but did not see real (ie greater than inflation) growths in revenue.
So yes it can - but only to a certain point.

Answer 3

Taxes that are too low don't collect enough funds for instructure, education, fire, police, welfare, health care. Taxes that are too high discourage working, invite evasive tax schemes, outflow of capital. outside the country. If Laffety curve theoretical idea is bulls%%. Why does eastern Europe tax collect become a lot more efficient then?



For example, income tax like progressive income tax is crude way to collect tax dollars. America should shift to a flat tax since the incentive to cheat would be reduce because anybody with Algebra down can figure out if someone is cheating a 17% flat tax. Russia went to a flat tax in 1999 and they collected 60% more revenue than they would with progressive tax system.



Still taxing the public and spending it on wrong priorities happens all the time, and higher tax countries like Sweden have more transparent legal systems to catch cheats. Yet culturally Americans in general will not pay more than 30% of income towards taxes period regardless what the left says. Before Ronald Regan American had 70% tax rates on the wealthy, and most of them lived places that had no tax treaties same with Great Britain at the time. Read your history books regrading you learn quickly that high taxation promotes off-shoring of capital more so. Britian and America go back to 90% tax rates money will go out of the country.

Answer 4

The theory is the Laffer Curve, the problem is that it is a mental construct and not tested by the real world.

Under the theory, taxes make work less attractive (and thus people will work less generating less income to be taxed). Thus, a higher tax rate equals a lower tax base. However, because the theory is just a theory, we do not know if the "perfect" tax rate that maximizes revenue is 10% or 90%.

The theory ignores several real world phenomenom. Most importantly, we work not because it is enjoyable, but to get money to spend on the things that are enjoyable. As such, cutting taxes allows us to reach the income level that we desire with less work with the result that cutting taxes can actually result in people working less rather than working more.

I know of no studies that would indicate what the perfect tax rate is. In the absence of such studies, the Laffer Curve is meaningless in any political debate based on substance. Since most political debates are based on rhetoric and not substance, you will hear lots of versions of the Laffer Curve used to justify easing the tax burdens of millionaires living on trust funds.

Answer 5

A lot of the answers so far are really only looking at the US tax system.
Firstly you have to specify of you are talking about abolishing ALL taxes or just personal income tax.
There are a lot of countries that currently have Economic Freeport Zones (or tax free zones). In the poorer countries they use these to encourage companies to invest there. Creating jobs, which in turns increases the amount of money spent within that location and hence creating more jobs to service that. Some say these freeport zones are stealing other countries money. However in the long term it is also increasing the global consumer market. which in tern affects any global company.
Of course this can take a while.
Else look at areas such as Dubai, they have zero personal tax and property tax. This is to diversify their economy. They know that they have 100 years of oil, but what after that, so they are in turn offering tax consession to broaden their economy. Namely tourism, of which they have a small tax on. So by decreasing personal tax, they are encouraging growth and development withing their own country and people are happy to keep their money within the country instead of sending it overseas.
Again by diversifying their economy and boosting their growth and development they are allowing a larger number of things that can be taxed, and greater consumer spending.

so yes i believe that by decreasing personal tax you will increase cash flow and in turn revenue. but it takes time.
much better to have a 5% tax on 100 different billion dollar industries than 30% on 2 or 3 different billion dollar industries.

Not to mention the increase in stability of the economy. if you have 1 industry out of 100 collapse for some reason you will only lose 1/100 of the overall tax revenue, which is often offset by people investing in one of the many others.

however if you have only 2 or 3 main industries and one of those collapses then you lose a full third of it, which decreases consumer confidence and in turn has a negative impact on the security of the other 2 industries.
This causes people to minimize all risk, halt consumer spending and causes recession.

Answer 6

Macro economics is quite complicated so there is no easy answer to your question.

The problem is not necessarily the taxes it is the way they are spent, where the money goes and what it accomplishes.

If tax money was paid to government employees who, in turn, purchased US made goods and services the money would flow back into the system. Welfare is a good example of this. People on welfare spend the money locally, they don't invest in offshore companies or freeze the money in offshore bond schemes.

Reducing taxes, on the surface, appears to be a good way to stimulate the economy because people will have more money to spend. Where do they spend it? Walmart, a multinational corporation that feeds the economic slavery of third-world nations or Toyota; another multinational corporation that uses Chinese prisoners in mainland China to built the autos.

Sadly, tax cuts always favor the rich who invest offshore so there is no advantage to tax cuts for the working man. Who cares if you pay $2300 or 2320 per year in taxes?

Answer 7

The Socialist ideology is a theory , fostered by a delusional, illogical minority and which holds forth beliefs that have no basis in reality. Under socialism, incentives either play a minimal role or are ignored totally. A centrally planned economy without market prices or profits, where property is owned by the state, is a system without an effective incentive mechanism to direct economic activity. By failing to emphasize incentives, socialism is a theory inconsistent with human nature and is therefore doomed to fail. Socialism is based on the theory that incentives don't matter! In my opinion Communism is an extreme form of Socialism.. @

Answer 8

Well, yes, cutting taxes for the wealthy create a more active economy for the wealthy and of course they create more jobs overseas.
In as much as money is necessary for infrastructure, i.,e., bridge repair, hmmm, roads and more roads and repair of same our State governments must levy tolls, fees, permits, etc., and residential property taxes to pay for all that without having to burden the wealthy with taxes.
Thanks

Answer 9

If they cut taxes to zero the revenues would be infinite.

Answer 10

In theory yes IF several other factors also occur concurrently. In actual practice you may gain short term benefits from such a policy but long term it becomes detrimental.