Archive for the ‘Paul Ryan’ Category

Finally election day has arrived. Good occasion to quote American journalist and satirist Henry Louis Mencken:

Every election is a sort of advance auction of stolen goods.

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Although it might be straightforward to any economist, the difference between tax rates and tax revenues frequently gets confused. Much talk from left-wing politicians assumes that any increase in the tax rate (preferable for the rich) will yield more revenue in the future.

As so often happens with economic issues, it takes a deeper knowledge of economics and history to sort things out. The intuitive assumption that higher tax rates automatically increase government revenue fails both in theory and in practice.

For the theory part, economist Arthur Laffer became known for a phenomenon called the Laffer curve. The Heritage Foundation offers a brilliant article on how this curve was developed and what it implies:

At a tax rate of 0 percent, the government would collect no tax revenues, no matter how large the tax base. Likewise, at a tax rate of 100 percent, the government would also collect no tax revenues because no one would willingly work for an after-tax wage of zero (i.e., there would be no tax base). Between these two extremes there are two tax rates that will collect the same amount of revenue: a high tax rate on a small tax base and a low tax rate on a large tax base.

With respect to historical evidence, I have found an easy-to-read article by Kurt Brouwer. By means of several figures, he explains the historical relationship between tax rates and tax revenues. His conclusion should definitely be considered by all people talking about the upcoming presidential election in the United States:

Tax policy is important, but it should not be political or partisan.  I believe we need a steady, consistent tax policy with two goals: generating steady and adequate current tax revenues and maximizing economic growth.

Finally, for the Jewish World Review Thomas Sowell wrote an article to explain that the confusing discussion about tax policy is quite a recent phenomenon:

There was a time when Democrats and Republicans alike could talk sense about tax rates, in terms of what is best for the economy, without demagoguery about “tax cuts for the rich.”

 

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When Ronald Reagan ran for re-election in 1984, he asked his famous question “Are you better off than you were four years ago?” and he answered it at the same time in a campaign commercial titled “It is Morning Again in America”. Therein, he listed all the ways the country was better off than it had been four years earlier when he defeated Jimmy Carter.

As Thomas Sowell points out, we should not wait for any “Morning in America” ads from Obama. Indeed, “Mourning in America” might be more appropriate.

Since his presidency has no track record that would win any votes, we will see an election campaign focused on distracting innuendoes instead of hard facts. Much like I expected months ago when I wrote that style will be more important than substance.

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