New material out recently. Even before the official body of work begins I’m impressed:
10 Golden Rules of Effective Taxation
This is gonna be good, I can just TELL!
1. When you tax something more you get less of it, and when you tax something less you get more of it.
It is wise to keep taxes on work, savings, and investment as low as possible in order not to deter people from participating in these activities.
2. Individuals work and produce goods and services to earn money for present or future consumption.
Workers save, but they do so for the purpose of conserving resources so they or their children can consume in the future.
3. Taxes create a wedge between the cost of working and the rewards from working.
This is why all taxes ultimately affect people’s incentive to work and invest, though some taxes clearly have a more detrimental effect than others.
4. An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues.
Lower marginal tax rates reduce the tax wedge and lead to an expansion in the production base and improved resource allocation. Thus, while less tax revenue may be collected per unit of tax base, the tax base itself increases. This expansion of the tax base will, therefore, offset some (and in some cases, all) of the loss in revenues because of the now lower rates.
5. If tax rates become too high, they may lead to a reduction in tax receipts. The relationship between tax rates and tax receipts has been described by the Laffer Curve.
…within what is referred to as the “normal range,” an increase in tax rates will lead to an increase in tax revenues. At some point, however, higher tax rates become counterproductive. Above this point, called the “prohibitive range,” an increase in tax rates leads to a reduction in tax revenues and vice versa. Over the entire range, with a tax rate reduction, the revenues collected per dollar of tax base falls. This is the arithmetic effect. But the number of units in the tax base expands. Lower tax rates lead to higher levels of personal income, employment, retail sales, investment, and general economic activity. This is the economic, or incentive, effect. Tax avoidance also declines.
6. The more mobile the factors being taxed, the larger the response to a change in tax rates. The less mobile the factor, the smaller the change in the tax base for a given change in tax rates.
A study by the American Enterprise Institute has found that high corporate income taxes at the national level are associated with lower growth in wages. Again, it appears a chain reaction occurs when corporate taxes get too high. Capital moves out of the high tax area, but wages are a function of the ratio of capital to labor, so the reduction in capital decreases the wage rate.
7. Raising tax rates on one source of revenue may reduce the tax revenue from other sources, while reducing the tax rate on one activity may raise the taxes raised from other activities.
…an increase in the tax rate on corporate profits would be expected to lead to a diminution in the amount of corporate activity, and hence profits, within the taxing district. That alone implies less than a proportionate increase in corporate tax revenues. Such a reduction in corporate activity also implies a reduction in employment and personal income.
8. An economically efficient tax system has a sensible, broad tax base and a low tax rate.
Ideally, the tax system of a state, city, or country will distort economic activity only minimally. High tax rates alter economic behavior. Ronald Reagan used to tell the story that he would stop making movies during his acting career once he was in the 90 percent tax bracket because the income he received was so low after taxes were taken away.
9. Income transfer (welfare) payments also create a de facto tax on work and, thus, have a high impact on the vitality of a state’s economy.
Unemployment benefits, welfare payments, and subsidies all represent a redistribution of income. For every transfer recipient, there is an equivalent tax payment or future tax liability. Thus, income effects cancel. In many instances, these payments are given to people only in the absence of work or output.
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In some high benefit states, such as Hawaii, Massachusetts, and New York, the entire package of welfare payments can pay people the equivalent of a $10 per hour job (and let us not forget: welfare benefits are not taxed, but wages and salaries are). Because these benefits shrink as income levels from work climb, welfare can impose very high marginal tax rates (60 percent or more) on low-income Americans. And those disincentives to work have a deleterious effect.
10. If A and B are two locations, and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A.
No explanation given.
There are real problems with the Laffer curve, but most of those points are valid. Still, the issue is complex. Social welfare payments that expand health care, education, and the capacity to compete in the work place can yield more employment, not less. Most people are on such programs very short term. I agree that long term dependence on welfare is bad, we should work to end that.
Moreover, the cost of security, a functioning and rational legal system, a functioning infrastructure that supports business, and similar such government functions are necessary for an economic system to operate well. If tax cuts threaten any of this, the result could be a worsening economy. Social stability is also important; if the gap between the rich and poor get too great, the poor will either revolt or demand changes that go beyond equal opportunity to instead ‘get the rich.’ Ultimately large discrepancies in wealth yield unsustainable political systems and worse outcomes. That means that taxes and transfers that assure stability can yield more benefit than their cost.
Finally, there is the collective action problem. Many things that would improve the quality of life (repave roads, build a park, enhance the schools) for all can’t be done by the market because it’s not in the individual self-interest of people to contribute. In such cases, taxation is rational and can improve a community. So the issue of tax rates goes beyond direct economic impact “all other things being equal.” One has to consider what the taxes pay for, and how the potential of losing those might actually hurt the economy. Same with social welfare payments — most people do want to work and use that only as a last resort. Cutting health care, education and other benefits, especially if it affects children, might hurt the economy by leaving people less able to work and compete once the economy improves.