Monday, August 2, 2010

Taxes and Prosperity

This is one of the most cogent articles on the relationship between taxes and prosperity that I have read in a while. 

Dr. Arthur Laffer, Stanford PhD and tenured professor at the University of Chicago, best known for the Laffer curve, explains, again, in simple terms why Congress and the White House are badly mistaken about the effect of a tax on government revenues and economic wealth. 

He recognizes, as most economists do, that income elasticity with respect to tax rates are disproportionate at the higher end of the tax spectrum. This is because of a greater incentive for individuals to expend resources to reduce tax liabilities at that level, and because they can. The people who really get hurt from higher taxes are the middle and lower middle classes. They have less incentive, because the tax avoidance strategies they might use are costly relative to the gains, and less ability to do so, because they have fewer shelters available to them (less assets, access to clever tax lawyers and accounts, and situations in which they can take deductions).

Bottom line, whenever government has reduced taxes, revenues have increased because the incentive to avoid is attenuated, and more wealth is created because the resources are put to productive use, founding and growing companies.  Whenever government has increased taxes, revenues have decreased because the incentive to avoid is heightened, and less money is available for wealth creation. More critically, when tax rates increase at the top end, more money goes into the non-productive part of the economy (tax lawyers, accountants, and financial products engineered specifically to reduce taxes), not in the making and selling of goods and services that increase social welfare.

The way to exit this economic meltdown is to cut taxes as quickly and as drastically as we can while maintaining a strong internal and external national security.

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