NCPA - National Center for Policy Analysis


September 18, 2007

Tax increasing Democrats are betting the new generation of voters does not remember how the old, high tax rates affected the economy.  In addition, they are trying to discredit the supply-side reforms that brought taxes down and fueled economic growth, says Richard W. Rahn, chairman of the Institute for Global Economic Growth.

One of the proponents of tax increases is Jonathan Chait, who spends considerable time in a new book challenging supply-side policies, including Arthur Laffer and his famous curve.  But the truth is, the Laffer Curve is merely a graphical presentation of the fact known for centuries that every tax rate has a revenue maximizing rate, says Rahn:

  • If a tax rate is considered too high, people will not buy the product -- they will pick substitutes, go to the black market, or do without.
  • The government will lose, rather than gain, revenue.
  • For example, some states now find they have raised cigarette taxes so high that tax revenues are falling.

The same concept applies to taxes on labor and saving:

  • If the tax on labor is too high, people will work less, as we have seen in France.
  • If the tax on saving is too high, people will consume rather than save.
  • The capital gains tax is a good example of a tax rate that was too high to maximize revenue; when the rate was cut under the Reagan, Clinton and Bush administrations, revenue increased each time.

In truth, the record is very clear about how the economy improved once the Reagan and, subsequently, the Bush tax rate reductions were enacted, says Rahn.  Thus, the new line of attack that the economy would somehow magically have improved without the tax cuts is the real discredit to history, says Rahn.

Source: Richard W. Rahn, "Revival of the tax hikers," Washington Times, September 18, 2007.


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