People talk about the Laffer Curve a lot whenever we consider lowering taxes. This curve is supposed to describe how different rates result in different levels of taxes collected. [Read up on the Laffer Curve] As you read this Wikipedia entry, did you notice that the only the beginning and end points are fully described: when the tax rate is zero, taxes collected are zero. Duh. On the other end, supposedly at a 100% tax rate there is no reason to work as you won’t get to keep any earnings, so you don’t bother working in the first place. The implication here is that productivity is also affected: higher taxes mean that productivity is supposed to go down. I doubt productivity is really zero when taxes are 100%, because money is not 100% of the reason why we work. My big problem with the Laffer Curve is that I doubt it always takes the same shape: depending on other factors, such as how the economy is doing and why, it MUST behave differently. I doubt you will find the rest of the curve described in any article anywhere; but if you do, I bet you will find that there are lots of qualifications that make the writer’s claim possible.
What inspired this post is this article about a Newt Gingrich visit to Georgia as he gets his campaign rolling. While Newt says a lot of great things, I get very concerned about how easy it always sounds to change tax rates; in this case, reducing them on corporations from the current 35% (for “C” Corporations such as GE that can have any number of shareholders) to 12.5% without mentioning any other changes to the tax code. Let’s say we did that: reduce that tax rate, but change nothing else about the tax code. Would that cause GE to change anything about how it sets up its operations, resulting in greater tax revenues for the government? Well, no!
Would all the extra money GE would get to keep, come back to the US in the form of jobs? I doubt it, because so much work can be done by cheaper workers in other countries. And at any tax rate, how could you collect what you think you should when so much of what GE does is outside the United States?
So maybe it makes sense to offer some kind of tax credit for hiring US workers…but it has to make financial sense to GE, enough so that it’s worth the cost of unraveling how they operate now PLUS the cost to pay American workers.
Another interesting tax Newt mentioned in his speech was Capital Gains – dear to our real estate hearts. REALTORS actually like the capital gains tax in the way that we love an enemy we need: because a real estate investor can protect his or her equity from Uncle Sam through Section 1031 tax deferred exchanges as real estate is sold and purchased, resulting in a chain of transactions with one client. Good real estate agents have helped an amazing number of “normal” people become wealthy using this tool. What’s the point? With a tool like this, where almost all taxes are avoided as an estate is built, the tax rate on capital gains (and depreciation recapture) has no meaning. So much for the Laffer Curve.
So, to summarize this long-winded post, changing tax rates without consider how those taxes are collected or paid, doesn’t mean much. What affects how taxes are collected – loopholes, incentives, etc. – probably means much more.
