Lynch: Raise Tax rates to get more $

HALT: Halting Arkansas Liberals with Truth

Dan Mitchell of Cato Institute on income taxes

In his article “Sizing up the new year,” (Arkansas Democrat-Gazette, December 27, 2010), Pat Lynch asserts,” Just so you understand, the federal deficit is somewhere just north of $13 trillion and the wealthiest taxpayers will not be even slightly inconvenienced as we pay down the national debt… Since the rich folks have been granted favored status by the continued Bush tax cuts and there is nothing to offset the revenue loss, slashing domestic spending is the preferred conservative option. Sooner or later, somebody is going to have to go after some real money.
The poor and elderly will pay off the budget shortfall.”

Mr Lynch assumes that raising tax rates is the best way to raise revenue. This is a myth. I am responding to these liberal assertions concerning the Bush Tax  Cuts with a portion from an article published January 29, 2007 called, “Ten Myths About the Bush Tax Cuts” by Brian Riedl. Riedl is the Grover Hermann Fellow in Federal Budgetary Affairs at the Heritage Foundation and Riedl’s budget research has been featured in front-page stories and editorials in The New York Times, The Wall Street Journal, The Washington Post and The Los Angeles Times.

Myth #6: Raising tax rates is the best way to raise revenue.
Fact: Tax revenues correlate with economic growth, not tax rates.

Many of those who desire additional tax revenues regularly call on Congress to raise tax rates, but tax revenues are a function of two variables: tax rates and the tax base. The tax base typically moves in the opposite direction of the tax rate, partially negating the revenue impact of tax rate changes. There is little correlation between tax rates and tax revenues. Since 1952, the highest marginal income tax rate has dropped from 92 percent to 35 percent, and tax revenues have grown in inflation-adjusted terms while remaining constant as a percent of GDP.

Despite major fluctuations in income tax rates, long-term tax revenues have grown at almost exactly the same rate as GDP, remaining between 17 percent and 20 percent of GDP for 46 of the past 50 years. The top marginal income tax rate topped 90 percent during the 1950s and that revenues averaged 17.2 percent of GDP. By the 1990s, the top marginal income tax rate averaged just 36 percent, and tax revenues averaged 18.3 percent of GDP. Regardless of the tax rate, tax revenues have almost always come in at approximately 18 percent of GDP (Office of Management and Budget, Historical Tables, pp. 25–26, Table 1.3, and Internal Revenue Service, “U.S. Individual Income Tax: Personal Exemptions and Lowest and Highest Bracket Tax Rates, and Tax Base for Regular Tax, Tax Years 1913– 2005,” at http://www.irs.gov/pub/irs-soi/histaba.pdf {January 16, 2007}).

Since revenues move with GDP, the common-sense way to increase tax revenues is to expand the GDP. This means that pro-growth policies such as low marginal tax rates (especially on work, savings, and investment), restrained federal spending, minimal regulation, and free trade would raise more tax revenues than would be raised by self-defeating tax increases. America cannot substantially increase tax revenue with policies that reduce national income.

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