TeeJaw Blog

High Marginal Tax Rates Don’t Raise Revenue For the Government

Posted in Government and Politics by TeeJaw on Thursday, December 2, 2010, 11: 35 PM

Something that does not raise revenue for the government is therefor not a bad thing in my book because I think the government doesn’t need more revenue, in fact needs less. But most people have been brain washed into believing that the deficit problem is a revenue problem, so here’s a look at that:

The chart above shows something that nobody can change.  High marginal tax rates do not raise revenue for the Government.  In fact, they reduce revenue because they hurt the economy and reduce GDP.  The reality shown by this chart is that the Government cannot collect more than about 19% of GDP in taxes no matter what it does.  If it tries to get more of GDP by raising taxes the people who would have to pay those taxes change their behavior in response to the new, higher taxes.  They don’t invest in business expansion that would create jobs and increase the supply of goods and services in the economy.  They don’t do that because the higher tax rate changes the risk-reward analysis of the investment.  If you are going to take a risk with your money you will consider the likely return if the investment is successful.  If the return has just been reduced by an increase in the taxes you’ll have to pay on the profits (if there are any) then the investment is not as attractive and you may not go for it.

If Obama and the Democrats are successful in raising the top marginal rate from 35% TO 39.6% on January 1st, an already weak economy will take a hit and government revenue will be less than it would have been if the rate had stayed at 35%, especially if it had been made permanent.  Obama actually may be so ignorant he does not know that.  I believe it’s possible.  He’s just not half as smart as he and a lot of other people think.  However, lots of Democrats know that reality is not optional, but they don’t care.  They know raising the top marginal rate won’t bring one dollar of additional revenue, is in fact more likely to reduce future revenue.  They ignore that because it’s not government revenue they care about so much as control over every nook and cranny of our lives.  High taxes are a marvelous tool for control freaks.  The power to tax is an awesome power.  It’s seductive, apparently.

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