That is a great insight! Maybe that is why the governments everywhere are moving to a VAT system (which can still be structured as a overall flat tax). This way, there is less incentive for the black market.

Arohan

Sorry the response has been long time in coming. I really appreciate you taking the time to write this detailed comment and hopefully I can do justice in my response to you.

First of all, let me agree with you that the overall quality of life across the society as a whole has declined in US, whether you compare it to other countries or to US 50 years ago. And yes, the government could have planned things a little better and not let consumerism run amok.

But I would disagree with you that cutting taxes at the bottom and increasing taxes at the top will lead to more spending and therefore more economic growth. The way I see it is that you will be increasing demand while stifling domestic supply, resulting in greater CPI inflation and/or increased trade deficits as foriegn companies rush to fill in the void. The tax policy needs to be balanced between producers and consumers.

And lastly, regarding your comment about the currency, I believe that the reason Federal Reserve exists is to control the money supply, which is basically matching the volume of the notes to the needs of productivity. It is not an exact science and all the wheels of the economy do not turn congruently and there fore you have the economic cycles and inflation.

Arohan

If you cut taxes on the rich, they do not necessarily invest it wisely in things that result in a sustainable return. Also, they often do not share the return by plowing it back into their businesses but rather hoard it paying capital-gains taxes only when required and/or spend it on personal high living. Meanwhile, the poor and lower-middle class and middle class do not do better in constant-dollar terms (adjusted for inflation). Of course, the method of calculating inflation has been altered to make it appear to be lower than it has been.

If you raise taxes on the super rich, the 19.5% can remain while the percentage of tax paid by the poorer people can go down or disappear entirely, thereby allowing them to save or spend more into the economy in the form of demand. The rich may not then keep more for themselves but so what? They won’t be poor, not even close to it. They will be surrounded by more people able to live decently thereby making the quality of life for those with higher incomes all the better without having to pay to be insulated behind high walls with hyper-security.

The economy was not small in the early 1950’s when the tax rate was at its highest. In fact, the U.S. economy was about 50% of the world’s economy. Granted it was just after WWII and the other nations had sustained war damage. The truth though is that one-income families in the 1950’s were doing better in real terms (equity and purchasing power) than two-income families have been doing for a long time, ever since the tax rates were so dramatically lowered with the promise of all ships rising with the tide for the rich. Trickle down didn’t work though. The Laffer Curve turned out to be a laugh, as predicted.

There are other costs involved in the equation as well, such as the costs of environmental damage and other costs of no regulation and insufficient regulation. Just using GDP doesn’t take those into consideration.

One must look at the overall quality of life across the entire society. Some of the social democratic nations have had much better statistical results in that regard than has the United States for instance. Infant mortality, literacy, longevity, health care, crime, vacation time, and many other factors must be weighed as well. Total quality of life for all is the proper gauge, not just what will afford the most growth of any kind (including detrimental to the environment and human health) and tax revenue.

Let’s not forget that it was military Keynesianism that finished pulling the U.S. out of the Great Depression and military spending isn’t as productive as infrastructure such as with the case of the U.S. super highway system built up under Republican President Eisenhower. Those super highways were and are socialist highways (at least the ones that haven’t been foolishly privatized into toll roads).

There is absolutely no truth in the notion that government cannot plan but only react. That idea is just false propaganda pumped out by those who stand to make the most selfish gain at the expense of everyone else. The ultra-rich pay people to conjure up public-relations sound bites to drill into the minds of people to duped them and make them or keep them as minions and servants and who don’t hear the alternatives, because the ultra-rich control the mainstream media and actually own the government that was supposed to belong to all the people. That’s why the losses on Wall Street were socialized for those hand picked by Henry Paulson but profits were not.

If you want to go far in cleaning up the mess, get rid of the Federal Reserve and switch to United States Notes. Get rid of the usurers. Adjust the volume of notes to exactly match the needs of productivity.

If you do this, it won’t be inflationary or deflationary. You don’t need any metals backing it up. You don’t need to issue any bonds, because you don’t need to borrow from anyone. Use the notes to pay off the National Debt, and be done with it.

Blessings to all, not just the greedy,

Tom Usher

As you rightly pointed out, tax revenues have multiple components and you will get no different opinion from me.

The thrust of the argument is that to increase tax revenues, we need to adopt policies that result in growing our GDP and not the policies that result in increasing marginal tax rates.

Thanks for posting the rebuttal link. I would encourage all readers to go and read the article as well as the comments to that article at Portfolio.com. The charts in this rebuttal article clearly shows a. tax yield has stayed constant even as the marginal rates have declined, and b. Individual income tax revenue (just one component of the tax yield) has actually risen as a percent of GDP as the marginal tax rates have declined

Final thought: All taxes are a tax on individuals income regardless of what diverse mechanisms are used to collect it. You take more of this income and there is less that remains to reinvest in growth. Understanding of this simple fact will help us devise better policies for the country.

“Historically it has been observed that tax yield (defined as tax revenues as a percent of GDP) has remained constant at 19.5% regardless of the marginal tax rates.”

This seems to be assuming that income tax is the only source of tax revenues! How about taxes on companies and government revenue from social security programs?

Rebuttal: http://www.portfolio.com/views/blogs/odd-numbers/2008/05/20/lying-with-charts-wsj-edition

Wan Kong Yew’s last blog post..Financial crisis revving up, not down

I hate the idea of penalizing someone for being successful. The problem I have is that we really don’t know how much the rich are putting back into their businesses.

I think we can all agree there is a huge divide between the haves and the have nots. Are current policies are not working but neither has socialism. Honestly, I don’t know what the answers are to this problem.

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Nothing will change for the better if the education problem will not be solved.

@Arohan: Now that I think about…I like the Tripple 0% Tax System! It would create a fair playing field for all income classes and it would increase consumer spending. One thing it will also get rid off is the idiotic socialist programs and individuals will not rely on them if they are not taxed and therefore get what they actually earned.

Those who are disabled will be taken care of by the tax revenues from the sales tax and the government should have enough tax revenues to take care of what they need to take care of. Maybe the highway systems should be privatized as well, just like the education system and the less government needs to take care of the less tax revenues they require which will allow over time to even reduce the flat sales tax.

Hey, maybe we should create our own party…hehe.

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