Government Economics – Why Lowering Taxes Means More Revenue

The August 5 debate of Republican candidates for the office of President of the United States had a number of interesting points, but one of the most intriguing came when a reporter tried to imply to Rudy Giuliani that raising taxes was the only way to provide sufficient revenues for things like bridge repair and infrastructure maintenance. Giuliani called the question a “knee-jerk liberal response”, and explained that the key is providing revenue, not pursuing a desire tp punish success.

As an example, let’s look at fiscal 2006. The U.S. Treasury Department reports that 2.4 Trillion dollars were received for fiscal year 2006, an 11.7% increase from fiscal 2005 and a 35.9% increase from fiscal 2003. The gist of that data proves that despite lowering federal income taxes, more money has been coming in. This is a peculiar effect, but it’s been shown before, under Kennedy and Reagan before Dubya tried it again. It seems reasonable to me, to examine the function of this effect.

Let’s start with that 2.4 Trillion dollars. That’s $2,400,000,000,000. Lot of zeroes, hmm? The U.S. population just kicked over 300 million this year, so that works out to $8,000 in federal taxes for every man, woman, and child in the United States. I didn’t pay $8K in federal taxes last year, how about you? And in fact, when we consider that the actual pool of taxpayers is much smaller than the 300 million people living here, round about 132.8 million people according to the IRS, so that means our average is really about eighteen thousand dollars per taxpayer. And no, I don’ think many taxpayers actually put out that much, either. So what’s going on? It may seem at first that the high-wage taxpayers are really getting socked, and they are, but really, when it’s all sorted out, what happens at the federal level is similar to what happens at the state, county, and city levels; it’s business where a lot of that money is made, and in short, if a business is healthy and successful, it pays more in taxes. With me so far?

OK, so it’s in government’s interest for businesses in general to succeed. So how does that work, exactly? It begins with the fact that taxes can only be applied to money which is used. That is, mechanisms like Sales Tax and Excise Taxes and so on, can only be applied when money is used in commerce. Employment taxes and withholding can only be done when employees are actually hired and paid. And since so many taxes are proportional to the level of commerce, the more business a company does, the more taxes it pays.

So what does raising or lowering taxes have to do with increasing revenues? Well, where do you think the money that comes into a business is originated? It comes from the consumers, of course. If the consumers feel times are tight and uncertain, of course they will not be interested in spending money, it’s just too risky, which attitude naturally slows down the economy. And when the economy slows down, so does tax revenue. Now, when on the other hand taxes are lowered, this provides taxpayers with more money, and a lot of that gets spent, which revs up the economy … and in spite of the lower rate, increases the amount of money which comes in to the government. It’s the same reason why stores put products on sale; the lower price is made up and more by the jump in volume sales if the manager has planned it right. Basic economics, really.