Wednesday, September 3, 2008

Governor Palin and Tax Cuts

Governor Palin made a pretty incredible speech on Wednesday night at the Republican Convention. She proved to be quite a powerhouse and an understandable source of fear for the Democratic ticket. One of the big issues for this election is the economy. Palin and the Republicans have indicated that they are for tax cuts, but how does that really affect the economy?

Let's talk specifically about raising taxes for the wealthy, a concept that the Left so often promotes.

The argument is that tax cuts only help the wealthy. If this means that the wealthy are benefited proportionately to the amount they pay in comparison to other taxpayers, this is right. It makes sense that if you have a tax cut, taxpayers pay less. The more taxes you pay, the more money you save from tax cuts. But as you should know, the wealthy still pay nearly all taxes. In fact, since the Bush tax cuts, the wealthy actually pay a higher percentage of all federal income taxes than before. In 2000, the top 25% of income earners paid 84% of all federal income taxes. That number was 86% in 2005 according to IRS data. If the argument that tax cuts only help the wealthy, this percentage should have decreased.

Another argument is that cutting taxes reduces federal income for needed government activities. While this is certainly the case as you approach 0% taxes, it is untrue in general. The truth is that optimal tax revenues are generated by a median and generally acceptable tax rate. Therefore, if taxes are too high (which they usually are), reducing the rate will lead to increased revenues.

This leads to another common argument that if tax cuts raise revenues, why don't we just make the rate 0% and have unlimited tax revenue. Professor Laffer made this concept understandable. If tax rates are 0%, obviously revenue is also 0%. If taxes are 100%, revenues are still 0%, because no one is going to work if the government confiscates all earnings.

I heard someone say, "You have to be kidding that I will work less if the government taxes me 2% more." This statement is probably true for that person and most, but as all economists know, there is a curve. Some people would actually work less. The greater the tax burden, the more it affects the incentive to work.

I look at the current tax system as a big bully trying to steal your lunch money. If you give up 2% more, what is to stop him from taking a little more and a little more? You have to stand up to bullies and say, "Enough is enough."

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