Why raising taxes on the rich results in lower tax revenue, part II

Someone I know (very liberal) wrote:

Good point, assuming keep 90k doesn’t turn into keep 80k (which would demonstrate the liberal assumption). However, most of the outrage is about business execs., entertainers, etc. who make millions/year. It is unfortunate that the small-business owner gets caught in this category (collateral damage).

You let the tax cuts expire, you lose some jobs; you make the tax cuts permanent, you add $700bn to the deficit (which we can’t afford). Damned if you do, damned if you don’t.

The problem is that most of the people in the category (and the vast majority of the $70 billion per year) ARE business owners — there isn’t that many millionaire/billionaire executives, entertainers compared to millionare/billionare business owners.

50% of American workers work for small business
44% of US payroll
99.7% of small businesses

Most new jobs are with small business
All non-corporate small businesses with more than $200,000 in annual revenue ($250,000 for married owners) would be subject to higher taxes meaning less new jobs overall.

Also, for non-business owner millionaire and billionaires, they’d be investing that money into tax-deferred investments, which would also result in lower tax revenue.

It’s been proven that increasing the taxes on the rich results in lower tax revenue, and decreasing taxes on the rich results in higher tax revenue. It’s called supply-side economics, and has been proven to work in several administrations:

1. Harding
2. Kennedy
3. Reagan
3. George W Bush

Look at tax revenues before and after tax decreases during all of their administrations. Notice how tax revenue went up after the tax decrease, thus lowering the deficit. Only the CBO has been able to predict a revenue increase, and the CBO is legally forbidden from assuming behavior changes, even though common sense states that behavior does change. Also, look at break down by income earner. After tax decreases for the rich, notice how the rich actually end up paying a higher percentage of the taxes!

How is this so? When taxes are lower, and you have a lot of money, you tend to invest more of it into riskier investments that result in higher returns (to get even richer). You get rewarded with higher returns. The government then taxes those returns, but you still get a higher overall return. Now when the taxes go up, you shift to tax-free investments, which are safer. But because taxes are free on these investments, they have a higher overall return than the riskier investment with the higher taxes.

Further proof: look at Canada. Their current GST is 5%. A few years ago, it was 7%. When they lowered the tax rate to 6% and then to 5%, both times, they saw HIGHER revenue. Why? People spent more, so more money was subject to tax.

By rewarding spending and investment, you get more spending and investment, which results in higher overall tax revenue.

One Reply to “Why raising taxes on the rich results in lower tax revenue, part II”

  1. Awesome blog! It is amazing to me how many people don’t understand basic economics like this. Maybe people are just too lazy to really look at the numbers and see what happens when taxes are raised on the rich vs lowered. I am not against the progressive tax, but we can’t scare all the richies away from investing. COMMON SENSE!

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