From: dean@vexcel.com (dean alaska)
Subject: Re: A Simple Thought Experiment (was Re: Derailing the Reagan Revolution)
Organization: VEXCEL Corporation, Boulder, CO
Date: Fri, 21 Aug 1992 16:53:33 GMT

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!

Agreed, so far.
>
>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.
>
Your initial conditions are wrong.  The starting point is now.  The
tax rate is now 28% for most income.  If we lower tax rates to 20%
and economic activity remains the same, revenues decrease by 8%.  If
economic activity increases by 4%, revenues _still_ decrease by 4%.
Economic activity must increase by an adequate amount  _and stay there_.
At marginally low enough tax rates, economic activity is defined by
demand for the product, not tax rates, which will have a second
order effect.  The Laffer curve would work if we lowered taxes from
100% to 90%, but at what rate does it become a second order effect?

>QED

NOT
>
>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.

As I said above, at some point, activity is defined bby demand and the
tax rate is not an important consideration.  You are considering only
one factor; or do believe that supply and demand are not important?
>
>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).

The U.S. is the lowest taxed developed nation.  Tax decreases, especially
capital gains tax decreases, can spur speculation that neither creates
jobs nor utility.  

-- 

		dingo in boulder	(dean@vexcel.com)