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Rothbard: Increase taxes to increase revenue

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Wheylous posted on Wed, Dec 5 2012 11:32 AM

 

In fact, historically, increases in tax rates have been followed by increases in revenue and vice versa (http://library.mises.org/books/Murray%20N%20Rothbard/Making%20Economic%20Sense.pdf)
1) He's not talking about ceteris paribus, right? He's merely talking historically.
2) Isn't there literature to dispute even the historial claim?
 
Is Rothbard here just holding a grudge against supply siders?

 

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Prime replied on Wed, Dec 5 2012 11:37 AM

I'm not sure about the answer to your specific question, but does it have to be impossible that a higher tax rate may in fact lead to higher revenues?

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I'm not sure about either question but I will ad my 2 cents on the topic.

Comparing tax rates as such to tax revenue isnt too telling in an envronment when the tax system is so convoluted. (and I know that is somewhat contradicts the point of the first question) If politicians raise tax rates they may also add in some extra loopholes for their friends. Even if they dont do this, there are certainly already a large number of deuctions and loopholes in our tax code. At low tax rates it is cheaper for the rich and businesses to just pay the taxes and at high tax rates it is cheaper for them to pay a tax lawyer (or team of them) to scour the code and find every deduction and loophole they can. This point is different for every company. 

if there were a level tax rate across the board things would be a little different. If increasing tax rates ceteris paribus always increased revenue then maximum revenue would happen at 100% tax rate. But this is obviously not the case because there would be no incentive to produce anything. 0% taxes would give no revenue for obvious reasons. Thus you can increase taxes to increase revenue only to a certain point before further increases actually begin to decrease revenue. This is the Laffer Curve.

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Rothbard: "In fact, historically, increases in tax rates have been followed by..."

Wheylous: "Wait, he's talking historically, right?"

smiley

 

According to the Laffer Curve, there actually is a tax rate range at which an increase in tax rates would lead to higher revenue.  (Which, logically I don't think you can argue...i mean, if taxes are zero, and you raise them to 1% accross the board, I'm not sure how you wouldn't end up with increased revenue.)

 

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Rothbard is looking at history and making a statement.  Of course the missing element in thie statement is time.  In the short term, before people in a complex economy can adjust their behavior to the higher tax reality, a majority of tax increases may result in increased revenues to the state.

Of course in the longer term, the increase in revenue may/will be lost as people make adjustments to their behavior to avoid paying the tax.

Also, it does not say that this is good for the rest of the economy.  In my opinion increasing taxes is always disasterous as the government uses this marginal increase in revenue as collateral to take on more debt.

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DD5 replied on Wed, Dec 5 2012 4:50 PM

Bogart:
Of course in the longer term, the increase in revenue may/will be lost as people make adjustments to their behavior to avoid paying the tax. 

 

I would argue that future revenue may be lost due to many factors - Taxes of any type or form lead to capital consumption - Taxes must always lead to higher time preference as compared to if no taxes were present.  In other words, there will be less savings and more consumption.  This can be proven by a priori reasoning.  This probably has more of an affect on capital accumulation and futrue growth then anything else, i.e., tax evasion, although no doubt those things also compound on the "problem", thus, less capital accumulation also means less future revenue for the government.  However, there is no simple connection between the two.  There are other factors.

But it is clear that the immediate outcome of a tax increase is more likely to result in an increase in revenue for the government.  The Republicans claiming otherwise are idiots, purely and simply!

Also, since the time preference of polticians is about that of a 5yr old, then it clear what path is more likely to prevail.  I would also argue that the argument over revenue misses the point about big government politics.  It is not so much the total revenue in absolute terms, but more of relative revenue to the private sector.  Those gaining personal gains from political power are more interested in relative control and power over society.  Not so much total revenue.  It's similar to the quest after equality, which is more of an important goal then the goal of the poorest man being better off if it's going to be in a society of inequality.

 

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Here is an interesting news article. Yes the media tends to oversimplify things but it is an exercise nonetheless. http://www.telegraph.co.uk/news/politics/9707029/Two-thirds-of-millionaires-left-Britain-to-avoid-50p-tax-rate.html

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When I said historical, I meant "he does not claim causation, but merely correlation."

I also didn't say I disagreed with him ;)

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cab21 replied on Wed, Dec 5 2012 9:35 PM

if the government increases collected, it increases revenue.

i don't think the government could increase revenue by not collecting anything.

it just depends on elasticity of the market.

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I think Rothbard is merely implying that there is a threshold for diminshing returns.  He says that when tax rates are at 98% and drop to 90% that there will likely be increases in revenue as people have a lot more money (even though 8% doesn't seem like much you have to realize that operating on 2% and moving to 10% is a big increase), but if rates are only at 38% and you drop them to 30% it doesn't warrant as great of an increase in activity. 

In economics, he claims, the masses want a massive welfare state, drastic income-tax cuts, and a balanced budget. How can these contradictory aims be achieved? By the legerdemain of the Laffer Curve. And in the monetary sphere, we might add, what the masses seem to want is inflation and  cheap money along with a return to the gold standard. Hence, fueled by the axiom that the public is always right, the supply-siders propose to give the  public what they want by giving them an inflationary, cheap-money Fed plus the illusion of stability through a phony gold standard.

I love Rothbard.  Taking it to the Establishment types in every way he could.

"The Fed does not make predictions. It makes forecasts..." - Mustang19
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