Lower Taxes Lead to Greater Revenue

I’ve been leisurely going through Hillsdale College’s free online American Heritage course. The other day I was listening to lecture 4, “The American Founding,” when I made a connection I hadn’t before.

The lecture is a detailed tracing of the movement from being loyal British citizens, asserting their traditional rights, to being independent peoples with natural rights. But there’s a story along the way, about taxes and duties.

For about four decades, the Whigs had been in power in the British Parliament, and they had lived by the philosophy of, “let sleeping dogs lie,” don’t upset what’s basically working. And that meant they had left the colonies mostly to rule themselves. There were governors, but the governors only got paid when the colonial assemblies voted to pay them. And Britain was three months away. So the colonists were pretty used to being left alone. 

But then a new prime minister comes in and starts to be concerned about those colonists getting too independent, and devises ways to crack down on them. I’ll let Dr. Paul Rahe tell this part (starting at 19:00 minutes into the video):

One of the things he does in April 1764, George Grenville, is to supplant the Molasses Act, which was designed to sort of ban molasses from America, with the Sugar Act. And it reduces the duties—the old duties had been set so high that no one could buy anything—so they cut the duties. In cutting the duties they were aiming at a revenue. And so the discontent in America begins with a tax cut, objections to a tax cut.

Well, the original tax was never paid, because it was so high it couldn’t be paid. The cut means that the British are going to seek revenue from the Americans in their own land. And the Americans respond to this with “no taxation without representation,” and they’re not represented in Parliament.

They tighten up the activities of the vice admiralty courts. The Americans were very efficient smugglers. One of the reasons they didn’t object to the Molasses Act is they smuggled molasses in and just skipped past the act. They’re going to tighten the vice admiralty courts so they can hammer these people. Then the Stamp Acts follow in 1965. The colonists are caught flat-footed. For forty-one years they’ve been left to their own devices, and suddenly there’s interference, and suddenly taxes are being imposed upon them, and there have never been taxes on them before

So here is something that governments knew back in the 1700s: higher taxes don’t mean more revenue; you get more revenue when you lower the taxes.

That’s the Laffer Curve, described by economist Art Laffer just forty years ago.

The Laffer Curve
from "The Laffer Curve: Past, Present, and Future," 2004

In short, there’s a point at which you can maximize revenue (if that is your goal—and it is often the goal of governments), and if you raise taxes above that point, the revenue will decrease. Because people avoid paying the tax if it is perceived as confiscatory.

Apparently the early colonists had no qualms about ignoring ridiculously high taxes, or duties (there are differences, but we’ll deal with them as similar enough for our purposes) by smuggling instead of obeying the British-imposed laws. In our day there might be other methods—moving a business out of the country, giving money to children in a trust where it can’t be touched, investing in times and ways that avoid tax, maybe even avoiding earning income over a certain level.

When taxes fall back into the range that people feel is tolerable, they start putting their money to use again, risking the need to pay the tax, because it’s worth paying in order to accomplish various personal goals.

That’s what happened when Reagan lowered to upper tax rate from 70% to 28%, which led us out of the Carter malaise and into a couple of decades of growth.

So, you’d think that if government officials really had the goal of raising revenue, they would find that sweet spot and use it. But they don’t. So they must have some other goal in mind—like appearing to care about the poor by confiscating from the wealthy,so they can get votes to retain their power.

Confiscatory taxes aren't good for a country. (Note: God asks for a flat 10%, given willingly, and maybe some extra offerings for the poor. Does government deserve more than God?) People take it personally when someone forcibly takes the fruits of their labors to use it for some other purpose. As John Locke put it, back in the day, “For what property have I in that which another may by right take when it pleases himself?”

If we want prosperity and growth in the economy, the way to do that is to set people free in the market, to earn what they can, and keep what they earn. You won’t get equal outcomes, but you’ll get better outcomes for everybody who participates.

Class Warfare Rhetoric vs Math

Chances are you’ve heard, in the last few days, the accusations against hard working Americans from Elizabeth Warren (senate candidate and special advisor to the Treasury). Her point was, essentially, how dare we resent having government confiscate our taxes, when it was government who granted us the ability to earn money in the first place!  

I understand a similar concept related to tithing. It is all God’s—everything. He grants us life and breath, and energy and ability, and the world in which we live. And in our case the best country on earth to live in. If we gave Him everything we have, we would still be in His debt. But He asks only that we voluntarily give a tithe—a tenth—of our earnings to Him, which He then uses for our good.  

I’m not resentful about that tithe; I’m grateful. But I have very different feelings about government. Take a look at what Warren actually said: 

I hear all this, you know, “well, this is class warfare, this is whatever. No! There is nobody in this country who got rich on his own—nobody. 

You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory—and hire someone to protect against this—because of the work the rest of us did. 

No look, you built a factory and it turned into something terrific, or a great idea. God bless—keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along. 

There’s something interesting here. What is the proper role of government? Protection of life, liberty and property. And you can argue for infrastructure. You can even argue for public education (although you can also argue against it, since public education provides an educated populace so much poorer than the private sector would and should do). So she lists just about only the things we already agreed, pretty much since our founding, were worth having government for. That’s why we granted those enumerated powers.  

She fails to list the innumerable extras we didn’t grant to government: welfare, social security, medicare, housing subsidies, government regulatory bodies, government science grants, foreign aid (particularly foreign aid to our enemies), and other obscene spending foolishness.  

And did we mention that the factory builder already paid his share of taxes while gathering enough capital wealth to build the factory? He wasn’t freeloading on the rest of us, as she seems to assume. 

If we were talking only about what she has listed, there’d be a lot less complaining about paying a fair share, or even what is a progressive tax already much higher on the wealthy.  

I happened to listen to another clip yesterday, posted in August, from the Mark Levin radio show. A caller named Paul Jackson from Michigan called in, having done the math. Here’s what he had gathered:  

Listen, the reason I’m calling is, I did a little analysis of the budget. The deficit for 2011, as you know, is projected to $1,650 Billion. If you add in the 1% cuts that the politicians just passed, that’s $38 B. If you say, OK, well the reason we have such a big deficit is because the evil George Bush made those tax cuts, if you dial up the tax rates for those making over $250,000 to 39.6% where it was under Bush, you… subtract an additional $65 B. If you say, well, it’s because the evil George Bush got us into these wars, if you back up the costs of, the projected costs of 2011 of Iraq, Afghanistan, the VA costs and everything, that’s an additional $171 B.  

Now we’re left with a budget deficit of $1,376 B. OK, then you can say, well it’s those evil, greedy companies that are doing this, like Exxon and Wal-Mart. As a matter of fact, let’s tax the Fortune 500 companies, the top 500 companies in this country, at 100%; let’s just take all their profits. If we do that, we’ll take an additional $232 B. Now we’ve got a deficit of $1,143 B. 

Now, as you know, Barack Obama’s gonna go around saying, Well, the reason is is the rich need to pay their fair share, and that’s the reason why, that’s where we need to get the money. OK, those making an income above $250,000, the income they made over $250,000 was probably by cheating some poor working person. So let’s just tax them at 100%. Let’s take all their money that they earn above $250,000 and confiscate all of it. Now we collect another $853 B. Now, after we’ve done that, after we’ve taxed all income above $250,000 at 100%, we’ve confiscated all the profits of the Fortune 500 at 100%, we assume we never went to war in Iraq and Afghanistan and we recover all that money, we still have a deficit, Mark, of $290 B. That’s nearly twice the deficit that we had in 2007 under the evil George Bush and those evil Republicans. 

He’s just talking about the deficit for this year, not accumulated deficits. He added his sources:  

One was Iowa Hawk, a terrific website…. And the other is IRS Data. And another one was, it was a government website on the cost of the war. The total cost of the Iran/Iraq War, from 2001 to 2011, and this is a government study, is $1.291 Trillion, and the projected cost for 2011 is $171 B. So you can confiscate all the money, and there’s still not enough.  

$1650 B -                   38 B  recent tax cuts -                   65 B  Bush tax cuts -                171B  war spending 2011 -                232 B  all Fortune 500 profits -                853 B all income over $250K $290 B

So, is it true people are complaining about the class warfare rhetoric? Yes, with good reason. The wealthy are already taxed way beyond what the Constitution allows the government to take for the enumerated purposes. Already the wealthy pay at higher percentages on each and every dollar they earn. Already the wealthy pay way beyond the total revenue of the middle class and poor (49% of the poor pay essentially no income tax, only FICA and state and local taxes). So it’s a little jarring to have someone come at hard working Americans and accuse us of being ungrateful for not enslaving ourselves to the whims of a greedy government.

Elizabeth Warren was an advisor to the President—and hadn’t done the math! Or else, she had done the math but ignored it for the sake of class warfare. Is there some other way to assess what she meant by her little rant? Oh, yeah, there is: a rather frightening belief that Obama and his government are indeed the new god and tithing—and tithing now means several times more than ten percent.