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The Politics of Taxation

The politics that surround questions of taxation demand that governments strive for a system that seems fair to the most people. It precludes actual fairness or reasoned thought in the science of funding government. In fact, it mostly just precludes any science or logic. The idea that you can generate more revenue with higher tax rates is a perfect example.

What rate Works?

What is lost in all the debate over tax increases versus tax cuts, is science. The Laffer curve, for example shows the relationship between tax rates and tax revenue collected. I'd guess that less than 5% of people understand this simple principle, but it is crucial to proper governance. It is the idea that as you raise taxes, you reach some point where actual revenues collected start to drop.

You can understand this at the extremes. If the government took 95% of your income in taxes, would you work much? No? Do they get any taxes if you don't work? No. More money will actually be collected if they take a lower percentage, right? Add to that the fact that every dollar the government takes can't be invested into new businesses, which would create more income, and therefore more taxes, and you can see that there is a point of diminishing returns.

Where is it? The science isn't that exact yet, but it seems to be somewhere around 15% to 25% as a total tax burden (federal, state and local). What this means is that if tax rates go higher than the top of the curve, the government actually collects less money. So even if a person or society want all sorts of social welfare programs, they have to realize that there is an ideal rate of taxation to get the most money to pay for these programs. Tax more heavily, and you get less, not more.

Politics trumps science, of course. Imagine if wealthy people are taxed at a rate that has them spending more time looking for loopholes than ways to make more taxable wealth. (If your friends don't get it when you explain this, point out that 20% of a million is more than 50% of three hundred thousand, so production matters - not just rates). Will a politician have a chance if he explains that the government can collect more taxes from the wealthy if the rates are lowered?

Most won't even try.

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Politics of Taxation