Posted by
Crescen7(Regis Matejcik) on Monday, February 05, 2007 6:30:19 PM
Preseidential candidate John Edwards has announced a plan to provide
health care for all Americans. He's acknowledged that it will
cost over 120 billion every year, and that it will require a tax
increase to fund the program. While Mr. Edwards believes he's
being uniquely candid about a admitting to a tax increase, his position
is illustrative of a general lack of knowlege about public finance.
In economic terms "tax rates" are roughly equivalent to the price of
government. In a private sector capaitalist economy "prices" are
set by a combination of market forces and the desire for the seller to
maximize gross profits. If a product is priced too low, sales may
rise, but the margin of profit may be little or none. If the
price is too high, gross profits per unit may be high, but overall
sales may be too low to cover fixed operating costs. Hence, the
concept of an "optimum" price. That is a price at which any
increase in price will cause a decline in profits due to a decline in
sales; and any decrease will case a decline in profits due to reduced
marginal profits per unit.
Every private sector business person is aware of the reality of an "optimum" price.
Few politicians are aware of the "optimum" price concept.
Market forces are also in effect when setting tax rates. While
the market forces are somewhat different, there can be little doubt
that changing the rate of taxes has an impact on the level of economic
activity. In general the same concept applies. There is a
point at which raising taxes will reduce the revenue to the
government. Likewise, it is possible that lowering rates may
result in higher revenue to the government. The tax cuts
initiated by Kennedy, Reagan, and Bush all resulted in raising revenue
to the Federal Reserve. The tax increses initiated during the
terms of Johnson, Nixon, Carter and Bush all had rather negligible or
negative revenue impact when adjusted for the inflation of the
period. It must also be noted that the massive tax increase
initiated by Bill Clinton resulted in a significant increase in
Government Revenue.
The point is that there is no certainty that "raising taxes" will
"raise revenue", nor is there certainty that "cutting taxes" will "cut
revenue."
The reason for the uncertainty is that the economic base to which
the tax is applied is not static. It is influenced by many
things, one of which is the tax rate. When taxes were raised in
the 90's, economic expansion was being driven by revolutionary
technological innovations. These strong expansionary market
forces drove expansion of the economy even though the higher taxes
exerted a contractionary effect. When the technological
innovation cooled, the contractionary effects of the tax increase began
to slow revenues. George Bush responded by adjusting the rates to
reflect the slowing market conditions, and revenues increased.
Given the current rate of revenue flowing into the Federal Reserve, it
is likely that our current tax rate is at, or near it's optimum.
That is, further cuts or increases are both equally likely to reduce
revenue to the Fed.
It would be an enormous step in the right direction if our political
heroes would just once consider that a "Tax Increase" may NOT give them
more money.