Economists as far back at J. B. Say and Gustave de Molinari in the 19th century understood this. As Molinari wrote in his 1899 book, The Society of To-morrow, “The laws of fiscal equilibrium set a strict limit to the degree within which it is possible to impose new taxes, or to increase the rates of those already in force. The relative productivity of taxes soon shows when this point has been overstepped, for then returns not only cease to rise, but immediately begin to fall.”
Things can work in the other direction too. Other things being equal, cutting tax rates can prompt revenues to rise. This is not to say rising revenue is a good thing. As Milton Friedman once said, if a tax-rate cut brings in more revenue, the rates weren’t cut enough. Hear, hear!
Nevertheless, revenues can increase after a rate cut. Case in point: the rate cuts of 2001 and 2003, the so-called Bush tax cuts, which President Obama (until yesterday) had been hoping would expire for the top 2 percent of earners. According to the Congressional Budget Office, revenues increased from $1.9 billion in 2003—when all the cuts kicked in—to $2.3 billion in 2008 (in constant 2005 dollars). At that point the Great Recession hit and of course revenues then fell. Tax revenues always fall in a recession because when people lose their jobs they stop paying the income tax. Companies also pay less as economic activity slows down. When would-be tax raisers today complain that revenues are a smaller percentage of GDP than in previous years, that is the reason. It’s not that the tax rates are too low.
It’s not about revenue. It’s about “fairness.” That is, it’s ultimately about “need” and “ability,” i.e., Marxism.
Related: “The truth is, politicians are telling lies.”
This is not an ideological argument about the moral advantages of a smaller state: it is simple economic necessity. As the man said, there’s no money left. And the only ways that anybody can think of for the state to get more of it are either futile (taxing the “rich”) or destructive of any possibility of recovery (more borrowing). What began as a banking collapse has turned into a crisis of democratic politics. Is this what we have to look forward to? The process of campaigning and voting will be an irrelevance: all parties will tell pretty much the same lies. Whichever one is marginally more credible than the others will gain power (probably in coalition with another bunch of liars), and then have to do what needs to be done in whatever desperate, underhand ways it can devise. Nobody will feel that he got what he voted for, because what he voted for was impossible.
And low-information voters believe them, which is how Obama and other Democrats got reelected. But the piper will be paid. As Glenn says:
Something that can’t go on forever, won’t. Debt that can’t be repaid, won’t be. Promises that can’t be kept, won’t be.
But as with any bubble, the issue isn’t if, but when.