Kyle Vande Weerd
Guest Columnist
In 1945, the peak income tax rate was 94 percent. Marginalized income tax rates have been declining since 1953. Despite this almost constant decline in tax rates, federal revenues have continued to rise both in real dollars as well as a percentage of the Gross Domestic Product. We have also seen the number of tax brackets decrease from 15 in 1981 to six brackets today. During that same time period the tax rate for the lowest bracket fell from a high of 15 percent to it’s present 10 percent rate of gross income; the top tax bracket fell from 70 percent to 35 percent. Reaganomics is much maligned by today’s left who claim that the lost revenues could have been used to not only pay off our debts but also put every American through college free of charge; such an argument is contradicted by the numbers. Despite a drastic cut in tax rates, government revenues increased by $400 billion during Reagan’s time in office.
How could this paradox exist … how can lowering tax rates lead to an increase in revenues? The answer is efficiency. Individuals and private corporations are more responsible with money than the government. This is not an indictment of our system of government – the same system has made America into an economic, military, and scientific juggernaut &- this is simply a cold reality of the human condition. Governments are more cavalier with tax dollars just as people playing with house money are more likely to bet big at a casino. Another characteristic of being human is greed. Many people would argue that wealthy, greedy business owners will simply pocket whatever money they save from a lower tax rate … and some of them will, just as some government officials will accept bribes or funnel money to their personal interests. The smart but greedy, wealthy business owner will re-invest their savings into their business, expanding either horizontally or vertically, hiring new employees, providing a service more efficiently than the government. Expansion of business ultimately means economic growth, which leads to increased revenue because even though the government is taking a smaller percentage, the base from which it draws that money is larger.
The Laffer curve has only existed within the minds of Western economists for about 40 years, but Arab scholars were experimenting with this idea seven centuries ago when Europe was just beginning to emerge from the Dark Ages and Baghdad was the center of the intellectual world. For those unfamiliar with the Laffer curve, it is a hypothetical projection of government revenues based on rates of taxation. The Laffer curve uses a parabolic projection to show that at a 0 percent tax rate the government will see zero revenue but at a 100 percent tax rate the government will also see zero dollars in revenue because people would find other means of trade (bartering) without the use of currency. The Congressional Budget Office estimates that the United States would see peak revenues with an income tax from 32-35 percent. According to the non-partisan CBO, we already have the theoretical maximum tax rate, which would support the greatest level of revenue for the federal government. A further increase in tax rates would not lead to increased revenues. Since 1980, over 40 countries have seen a decrease in marginalized income taxes, including Sweden, a country which is villainized by the right and heralded by the left for their progress tax and economic systems.
Kyle Vande Weerd is a student at SDSU and a member of the Political Science Club. Contact Kyle at kdvandeweerd@jacks.sdstate.edu.
Related posts:
Follow Us!