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Cutting Tax Rates Leads to Larger Tax Takes
After reading James Pethokoukis’ latest piece and the comments following, I thought members might be interested in this exchange in the British House of Commons today. The issue under discussion was the corporate tax rate which has fallen from 28% to 19% since the Conservatives-Liberal coalition came to power in 2010. Conservative backbench MP Philip Hollobone asked:
“Will the Minister tell the House by how much the corporation tax take has gone up since the corporation tax rate was cut?”
To which Mel Stride, the Financial Secretary to the Treasury and Paymaster General, replied:
“This is an important point. As the corporation tax rate has decreased to 19%—it will go down further to 17%—we have seen a 50% increase in the take, which is an amount in the order of £18 billion.”
Now, even allowing for the usual government massaging of the figures, that is something to trumpet.
Published in Domestic Policy
When I was growing up, the English billion = US trillion. Now I find out that true to form, the British Government changed to the American Billion in 1974.
Given that one English Pound (£) = $1.30, we could have easily paid off our debt if cutting corporate taxes would increase revenue by such a large amount, ($23.4 Trillion) but alas only $23.4 Billion.
But given that our GDP is about 7 times larger, it’s still above $150 billion in the US.
The correlation between tax rate and tax revenue is not linear. In fact at some point an increase in tax rate will decrease tax revenue, because people will change their behavior and not produce as much. Reagan tax cuts resulted in revenue increases. It is nothing new, and shouldn’t be surprising.
Thomas Sowell wrote about rates and revenue here: https://townhall.com/columnists/thomassowell/2012/09/19/the-great-tax-divide-n1260108
If the “tax take” were the issue, our rates would have gone down years ago. However, that is not the issue. The reason our tax rate is so high is that those in power wish to punish evil corporations for keeping all their windfall profits, by supposedly returning that money to those who deserve it more. Taxes don’t exist to fund government, but to reward your friends and punish your enemies. Just look at all the carve-outs for favored segments of the economy. And Democrats still believe that corporations actually pay taxes.
Trumpet away!
The Laffer Curve at work. I wonder if the Laffer Curve for businesses has a significantly different distribution than for individuals.
Taking more money from some one else is hardly an accomplishment.
The revenue-maximizing corporate tax rate was assumed to be 28% back in 2007. This new evidence of increased take at a lower rate suggests that was wrong but eventually low rates will stop yielding higher returns, even Dr Laffer points out that at a 0% rate you have a 0% take. The argument for lowering rates below the revenue-maximizing level is of course the incentives for extra economic activity and higher (taxable) wages; the argument against is that businesses tend to pass costs on to the wider community, so-called externalities, which they should contribute towards (I am not arguing that it takes a village…).
Encouraging more people to start businesses and make profits is certainly an accomplishment when so much that government does has the opposite effect.
In Government’s view, no business should make a profit, because those profits benefit only the business and not the real beneficiaries (workers, families, communities, government). In the Liberal viewpoint, all entities should be non-profit. However, what they are missing is where the “non-profits” get their funding. From profit-making enterprises! Remember the slogan “people before profits”? Without profits, no one gets paid.
It may have been a political slur but back in the 2015 general election apparently Ed Miliband, the previous Labour party leader, went to a meeting with business leaders and asked them why they needed to make profits….
I’m not sure I want the government to have more money regardless of how they accomplish it.
Pethokoukis voted for Hillary Clinton.
Walter Williams has said that the country would be better off if, every April 15, you bundled up what you owe in taxes, and threw it into the fire.
Jolly Good Show Old Boy!
Of course within certain parameters in a highly progressive tax system, cutting tax rates will increase tax take, as demonstrated by the Mellon tax cuts of 1921, the Kennedy tax cuts of the early sixties, Prop 13 tax effect, the Reagan tax cuts and the Gingrich cut in the Capital Gains rate in the 90’s.
And the reverse is also true – higher tax rates and regulation as enacted by Buraq Hussein resulted in a substantially low tax take.
Everyone can do that every year. Write a check for the amount, sign it, and burn it.
Seawriter
Indeed it does. It is a mistake to assign much elasticity of revenues to individual rates except at the highest income levels. Salary and wage earners can’t play many games no matter what the rate. Corporate managers can pay themselves with options and take their pay in other ways that pay lower taxes and the super wealthy can do the same things big business can do. So can individuals with significant income from investments. Business, whether large or small ( but not tiny) easily shield income, by moving personal expenses to business expense, investing in the business with pre tax earnings. Bush gutted the tax code by reducing taxes for lower income folks. He did so presumably to avoid the charge of tax cuts for the rich. He was naive. The Democrats don’t base their attacks on reality and now we’re stuck with half the population not caring if rates go up or expenses grow. An ideal tax reform would raise rates on lower income folks and lower it for upper brackets, corporations and capital gains. We can restore lower income earnerings by encouraging them into tax free accounts, HSA and IRAs which would be good for them and the country. All tax reform will be called tax cuts for the rich, so we might as well do it right. That is one of the advantages of the Democrats not having any principles and always attacking. They become irrelevant if we just ignore them.
I once had a chat with Senator Bob Packwood years after the 1986 tax reform bill that was his signature legislative achievement. He said was still amazed that when at a hearing he questioned the CBO and OMB guys about why they used used static analysis for the effects of tax cuts/increases. He asked what what would happen if the tax rate were 100%? Would the models continue to show a linear increase in revenues? They said yes, they would have to say so given the models they used.
The modern Democratic Party is increasingly less concerned with economic growth and more interested in punishing private sector success. The weird ignorance that lets the Bernie Bro’s believe that the feds can keeping reaching into the infinite hidden magic corporate wealth supply to provide whatever we want combined with sheer malice and envy is the most dangerous force in our country.
This makes no sense. Next, are you going to suggest that increasing the minimum wage causes lower wages and higher unemployment? Poppycock!