Saturday, December 18, 2010

An Alternative to a Tax Increase

"Those who cannot remember the past are condemned to repeat it. " ~ George Satayana

Increasing taxes to reduce the deficit or increase tax yield doesn't work. Those that say otherwise are ignoring historical data.

  • Additional tax revenue does not offset a deficit. Higher Taxes Won't Reduce the Deficit (subscription may be required to view article) by Stephen Moore and Richard Vedder in The Wall Street Journal confirmed what I have suspected: increased tax revenue does not reduce the deficit. In fact, Congress spends an average of $1.17 for every dollar increase in tax revenue. The data from 1947-2009 showed spending increases ranged from $1.05 -$1.81 for every additional dollar of tax revenue collected, despite promises of spending cuts by Congress in return for tax increases.

  • Higher taxes does not increase tax yield. In an earlier post, Will Higher Tax Rates Create More Tax Revenue?, Hauser's law claims that the tax yield has been relatively stable at about 19.5%, despite a decline in the top tax rate from 91% to 35%. One reason may be that higher tax rates cause individuals to shield or delay taking income to reduce taxes.
To me, a better solution to increase tax revenue is for the government to focus on enabling economic growth. Doing so makes great financial sense. When the economy grows, GDP increases, and the amount of tax revenue also grows. In addition, the employment rate goes up, which makes voters a lot happier :-)

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial advice. Please consult a professional advisor.

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