Cycloptichorn wrote:Quote: Whether we in the 15% tax bracket like it or not, reducing the disgressionary income of the more wealty will decrease their continued investment in the economy
Is this proven? Or conjecture?
It is neither proven or a conjecture. There is considerable evidence that this is more probably true than not.
When Carter was President, the maximum income tax rate was 70%. We then had a so-called
double digit inflation rate, interest rate, and unemployment rate.
When Reagan slashed the maximum income tax rate to net 33% (first he cut it to 28%, then subsequently increased it to 33%), we subsequently enjoyed a so-called
single digit inflation rate, interest rate, and unemployment rate. Federal revenue from the income tax doubled over the Reagan 8 years. However, federal expenditures almost tripled.
Both the terms of Presidents Bush-41 and Clinton benefited despite their increasing the maximum income tax rate to 35%(Bush-41) and to 39.7%(Clinton).
By the way, President John Kennedy's term also witnessed sharply increasing federal revenues from a large reduction in the maximum income tax rate.
What is the explanation for this phenomena? What logic can explain it? After all, it
seems logical that increasing the tax rate will always produce more total federal income tax revenue, while reducing the maximum tax rate will always produce less total federal income tax revenue.
The practical explanation is: Taking a higher percentage of the income of the more wealthy and giving it to the government reduces the amount of total private economy investment available. That in turn reduces the rate at which new and old private businesses grow. That in turn reduces private economic growth. That in turn reduces the rate at which jobs in the private economy grow. Yes, the rate at which government jobs grow is enhanced by a higher maximum income tax rate, but that growth is much smaller than if the same money were invested privately in the private economy.
The theoretical explanation is the Laffer Curve. Laffer argues that total income tax revenue is zero at two different maximum income tax rates. Obviously, a maximum income tax rate of zero%, will produce zero federal income from the income tax. I think it also obvious that a maximum income tax rate of 100% will also produce zero federal income from the income tax. Who will work for nothing? So the
optimum maximum income tax rate is that rate which will produce the greatest total federal income from the income tax. What is that
optimum? Knowing that is clearly important because a maximum income tax rate that is greater or less than that
optimum will produce less total federal income from the income tax.
The
optimum is highly dependent on other major expenses that must be paid by the whole private economy. For example, when the price of energy (e.g., oil) is low, the
optimum will be higher than it will be when the price of energy is high.
The current cost of energy is high now. Consequently, I estimate that the current
optimum is probably well under 30%. My estimate is based on historical economic data gleaned from my library of almost 40 years of Britannica Year Books.
Thanks for asking!
