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Thursday, September 13, 2012

WHAT’s UP WITH TAXES?


WHAT’s UP WITH TAXES?
 

Election time is nearing, and with it will be even more talk about taxes than we normally have.  In general, Republicans want to lower taxes, Democrats want to raise taxes.  Of course Republicans want to lower taxes for those who make up the largest portion of their voting base and Democrats want to raise taxes on people who probably will not vote for them anyway.  What’s up?  Should taxes be raised or lowered?

In 1968 I graduated with a degree in economics.  I had a C+ average in this major so listen up!

We have taxes for two reasons.  To raise revenue to pay for the functions of government that only government can supply.  We have taxes to discourage behavior that is deemed to be undesirable for the community (Smoking, drinking, making weird faces.)

Raising revenue to pay for government functions is important.  The question is who should pay taxes and how much should they pay.  In this country it is generally agreed that the wealthiest citizens should pay more than less wealthy citizens.  We have among our many taxes a graduated income tax which insures that the wealthiest citizens do in fact pay the highest rates. 

There are those that will play games with percentages and numbers and try to prove that the wealthy do not pay their fair share.  For instance a person could have an income of one million dollars a year and pay no income tax at all if his income is only from tax exempt securities such as municipal bonds.  Good point, except that this same individual could be earning an income of two million a year if he invested in taxable instruments.  The lower rate that government bonds pay out is in effect a tax.

In any event, to the question should taxes be raised or lowered, the answer is the tax rate should be at whatever level results in the greatest government revenues without producing a significant surplus.

If raising taxes discourages investment and hard work resulting in lower revenue then raising taxes is a bad idea.  Let’s take that to the extreme:

You earn $1000 a week and pay no tax on that income.  A new tax is instituted that imposes a 98% tax on every dollar earned over $1000.  Your boss asks you to work overtime for what now would be 2 cents for every dollar earned.  Would you volunteer to work overtime?  Probably not.  If no one works the overtime, that is bad for government revenues and bad for business which needs the extra labor.  Higher rates can mean lower revenues.

OR

If lowering taxes fails to increase incentive to earn and produce more, revenues will suffer.  Once again taken to the extreme:

You earn $1000 a week and pay 10% tax on all income.  A new tax rate is lowered to 9% on all earned income.  Would this lower rate encourage you to work more hours or take a second job?  Probably not enough to make up for the lower government revenue due to the lower tax rate.  In this case a lower rate means lower revenues. 

The issue of raising or lowering taxes should not be based on your political affiliation; it should be based on what will maximize revenues.  Sometimes taxes should be raised to meet this objective, sometimes they should be lowered.

The optimum tax rate for raising revenues varies with every income group and it is a moving target as various outside influences change.  Tax rates should not be set to punish success or to reward failure.  Tax rates should be set the same way industry sets prices, to maximize profits (revenue.)

If your vote is based on tax rates, you should vote for the tax position you believe will ultimately be the best at producing revenues.

The next issue is whom should have their taxes raised or whom should have them lowered.  Once again it all comes down to what will bring in the highest revenues.

As long as you raise taxes on the other guy and lower mine.

 

First They Came For The Billionaires

By Anonymous

First they came for the Billionaires.

I didn’t speak out; I’m not Bill Gates.

Then they came for the millionaires.

I remained mute; I’m not in that class.

Then they came for the Rich, however that’s defined.

My mouth remained shut; it still was not me.

Soon they came for the middle class; for now we were the rich.

I finally spoke up, but I was poor and nobody listened.

7 comments:

  1. Bingo! That's the way it should work. The trick is to keep it in balance and pay as you go, except during and emergency (such as wartime), then a deficit is understandable. Just pay it off after the emergency is over.

    But unfortunately we've let taxes/spending get out of whack for decades. We need more money NOW, if not to balance the budget, but at least to show a solid effort towards that goal. This needs to be a slash spending/raise taxes affair, but both sides are intractable. The Dems have their Pelosi's and Reid's and the Rep's have their "young guns". Both should be forced to take a week long teambuilding course together in Alaska's North Range....and conveniently left there.

    IMO, taxes on the rich need to be raised....note I didn't say it was right, or fair, but it is necessary. We need to give the appearance at least of making a dent in the deficit, and only the rich have the extra cash to pay more. The middle-class is stretched thin as it is, and besides, THEY are the consuming engine we're looking to to "grow the economy". But to balance that injustice, we MUST cut spending, and it must be across socio-economic lines. Everyone wants to cut spending by cutting "the other guy's" pet programs. That can't happen this time. Everyone must take their medicine.

    I've read many places that 50% of the public pays NO taxes at all. I understand the technical definition of "poor", but can't they pay $50 or so a year? I think it would go a long way to ease the tensions between those who pay and those who don't. Just a thought.

    S

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  2. WEll said. I was just telling my hubby the other day that the way the government runs their finances is insane. An average American family can budget better than they can. I think they should have taken your classes back when you went.. Maybe one of them would have come out with some common sense. :)

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  3. How could I possibly argue with an overachiever who got a C+??

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  4. But what have "they" really done to the billionaires. I'm waiting for those results before I decide.

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  5. Since I'm one of those who has no clue about taxes, budgets or adding 2+2 together, my eyeballs are bulging and my head is spinning. But I'm sure you're correct. You MUST be...it all sound so professorial. Smiles.

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  6. I bet you got the C+ because you and prof didn't always see things the same way
    That didn't necessarily make him right

    BTW - good Econ lesson here

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  7. These days the Republicans keep touting Bill Clinton as a great president, so why can't we go back to the tax rates during the Clinton administration? Most people were making money back then.

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