From: fierro@uts.amdahl.com (Doug Fierro)
Newsgroups: talk.politics.misc,alt.activism,misc.headlines,sci.econ
Subject: Re: <None>
Date: 22 Aug 92 00:41:33 GMT
Organization: Amdahl Corporation, Sunnyvale CA

In article <1992Aug21.140542.1@vxdesy.desy.de> forbush@vxdesy.desy.de writes:
>In article <1992Aug21.101049.23288@nuscc.nus.sg>, ipser@solomon.technet.sg (Ed Ipser) writes:
>> In article <1992Aug20.224302.2246@vexcel.com> dean@vexcel.com (dean alaska) writes:
>>>I understand, and accept, the idea that lower taxes can be an incentive
>>>for economic activity.  I am challenging the claim that there will be
>>>_enough_ activity to increase revenues.  The activity may increase by
>>>a marginal amount and that increase may also be transient, as has been
>>>shown for studies for the case of capital gains reductions.  Such a
>>>reduction will lead to a short-term increase as people cash in on
>>>paper profits, but after the sell-out, the lower tax rate becomes the
>>>dominant factor.
>> 
>> Let's perform a thought experiment. Suppose, just suppose, that the
>> tax rate were 100% (taxes have, at various time in this century
>> approached that point).  Question: What idiot is going to engage in
>> taxable economic activity? Answer: Noone. Question: How much tax
>> REVENUE is generated?  Answer: ZILCH!
>> 
>> Now suppose this socialist paradise decides to reduce the tax rate
>> (pick a number less than 100%, say the current tax rate). What
>> happens? Taxable economic activity begins to occur. And as taxable
>> economic activity increases, tax revenues are created. Now, since any
>> revenue generated is going to be more than was collected under the
>> 100% tax rate, it follows that, in this instance, a reduction in tax
>> rates has generated an increase in tax revenues.
>> 
>> QED
>
>Not quite, you are ignoring the other endpoint in your thought
>experiment. Suppose that the tax rate is 0%. How much REVENUE
>is generated? Answer: ZILCH!

Touche.

>This problem is not the simple linear extrapolation that you
>are suggesting, but some function with a maximum at some
>positive value. This maximum is dependent on the economic
>conditions both past and present. 

  Yes, there is a 'maximum utility' for taxpayers where the gain in
money earned after taxes is still worth the extra hour of labor.  One
taxpayer may choose to work an extra 10 hours a week to take home 
extra cash after those ten hours have been taxed, while another taxpayer
may not have the same utility curve- she may feel the extra money earned
does not outweigh time spent at home with the family.  Things also get
complicated to anylyze since the U.S. income tax system is not a flat tax.

>A very similar problem is happening in the interest rate
>cuts that are being done to increase investment. Why doesn't
>the fed just move the rate to 0% and be done with it?
>Everyone could get free money and the economy would boom.
>
>Sorry, I live in a real world.
>
>			Mike					
>> 
>> The only real question among serious economists is at what point, not
>> whether, lower tax rates stop producing higher revenues. However,
>> lower tax rates will ALWAYS generate greater economic activity even
>> beyond the point where the increase in economic activity is
>> insufficient to offset the loss of tax revenue due to the lower rate.
>> 
>> That is, lower tax rates are ALWAYS better for the economy and OFTEN
>> will be better for the government`s budget (especially in overtaxed
>> nations like the US).

  Well, better for the short term economy- if you cut taxes to a point where
education, defense (civilian and military) and health care etc. are 
compromised, after a while you are going to have an uneducated work force that 
cannot contribute much to the economy, people overburdened with health care 
costs, and looting of personal property due to inadequate law enforcement that 
will hinder the economy.  Of course this is a pretty dismal picture- the main 
idea is that you have to think about long-term investment for the economy, 
and what the consequences are of not making those crucial investments via
tax revenues if tax rates themselves are reduced beyond the critical point-
what that point is to sustain sufficient investment for the future of 
society I don't know.
 
   (Oh yeah, please no Libertarian rhetoric on how people will pay for this
    out-of-pocket on their own instead of having the govt. do it :-)

  Doug
-- 
                                                     Doug Fierro
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