Tax Rates vs. Tax Revenues

By Erroll Ivery

When a politician says they're going to raise your taxes, what they really mean is they're going to raise tax rates. Lost on the minds of Democrats and Barack Obama is the fact that an increase in federal tax rates does not necessarily mean an increase in federal tax revenues. As a matter of fact, history reveals just the opposite is true.

In 1961 when John F. Kennedy became President, the top marginal tax rate was 91%. Kennedy lowered the top rate to 70%, and more revenue came into the federal treasury from the top wage earners than under the 91% rate. Why? For the same reason that more revenue is often raised at department stores sales than when merchandise is at the regular price. More people execute transactions more often, which increase revenue, even though items are being sold for less. When tax rates are lowered, more people execute transactions that generate tax revenue more often than execute them at higher tax rates. Why? At the lower tax rate, the transaction represents a better value to the taxpayer. They get to keep more income per tax generating transaction, but the increase in the number of transactions generates more revenue for the government. The goal of tax policy should be to generate more tax transactions and the way to do that is to have the equivalent of a tax sale!

When Ronald Reagan became President in 1981, the top marginal tax rate was still 70%. Reagan lowered the top rate to 50%, and then to 28%, and at every reduction of the top marginal rate, revenues to the federal government from top wage earners increased! Seven years after the Bush tax cuts of 2001, we still hear the phrase "Bush tax cuts for the rich" despite a 2005 joint IRS / Congressional Budget Office report revealing the top 5% of income earners saw their share of taxes paid rise at a faster rate than their share of income under the Bush tax rates than the Clinton tax rates. Yes, their share of income rose, but their share of taxes paid rose faster because of the attractiveness of executing tax-generating transactions at Bush's lower rates more often.

The Democrats desire to punish financial success as if it is always undeserved. Punishing success is more important than allowing more revenue to come to the federal government because of financial success. Democrats need scapegoats to make the enemy of the middle class through class warfare rhetoric. To admit that lower tax rates are a win-win situation for tax payers at every income level and for the government would eliminate the need for scapegoats to use to rally the middle class against the rich, and thus largely eliminate the need to vote for Democrat socialists. The Democrats need to raise tax rates on the rich for political reasons, because economically it makes no sense if the goal is to increase revenues.