Higher tax rates or tax revenue?
Mr. Worth asked Adrian Vance how we could lower our national deficit without raising taxes (Record-Bee Feb 7, 2009). I”m sure Adrian will properly respond but I wanted to just comment on something that is frequently missed by many of us. There is a difference between tax rates and tax revenue.
Lowering tax rates can actually increase tax revenue and conversely raising tax rates frequently results in less tax revenue. If that is so, why would Nancy Pelosi and Harry Reid even consider raising tax rates in our troubled economy? Someone else will have to answer that, it is beyond me. As a simple example of the tax rate to revenue relationship (and I understand our economy is far from simple) please consider the following.
Lets use corporate or company taxes in the example however similar dynamics exist for personal income taxes. A company includes taxes on its profits as one of the expenses of doing business, as are employee costs, materials, advertising etc. High tax rates limit other expenditures, less employees, less advertising, higher prices etc.
A company paying a high tax rate of 35% might in our example generate 1 million dollars of profit and generate $350,000 of tax revenue. Since they are competing with other companies in the world who have lower tax rates, they could easily have had no profit and paid no taxes. Now if we lower the tax rate to 20%, they are more competitive and have a greater percentage of their revenue available to hire workers and invest in business growth assets ? instead of taxes.
As a result our company now generates 2 million of taxable profit, and pays 20% or $400,000 in tax revenue. The Bush tax cuts in 2003 actually produced an increase in tax revenue. Most of you already knew this, but be careful when you are asked to support tax rate increases as they frequently lead to where you do not want to go.
Ed Calkins
Kelseyville
