Lower Taxes, Higher Revenue | 5 Minute Video
Should tax rates be higher? It’s the million dollar question! Up? Down? No change? Where in the world should taxes go? In election years, the question of tax rates fills the airwaves. In non-election years, the question of tax rates, again, fills the airwaves. So what’s the answer? UCLA Professor of Economics Tim Groseclose explains his research on the topic. Basically, there’s a certain point at which higher tax rates actually reduce the amount of revenue the government collects. What’s that point? When are tax rates too high? Learn a valuable lesson in economics, and public policy.
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Script:
Let’s discuss an important concept from economics, the Laffer Curve.
This concept is named after the man who developed it, Arthur Laffer, a major American economist who has taught at the University of Chicago, University of Southern California, and elsewhere.
The Laffer Curve illustrates the two most important things we need to know about taxes: how much money the government can raise from taxes and at what level of taxation the government might start getting less, not more, revenue.
The Laffer Curve is illustrated here by a two-dimensional graph. The horizontal line is the tax rate that the government chooses, and the vertical line is the revenue that the government receives from that tax rate.
First, because zero times any number is zero, if the tax rate is zero, then the government receives zero revenue. Accordingly, zero-zero is our first point on the curve. Now suppose the government chooses a very small tax rate, say 1 percent. The government will then begin to receive some revenue from citizens. This means that another point on the curve must be something like this. Now suppose the government charges a 2 percent tax rate, then everyone would agree that it will receive even more revenue — which means that another point on the graph must be something like this. And if the government keeps raising the rate, then revenue will continue to go up. at least when we’re in the low-tax-rate part of the graph.
This means that if we fill in the curve, it has an upward slope — at least when we’re in the low-tax-rate-part of the graph.
Now suppose the government charges a 100% tax rate. If this happens, then no one would work. That is, why would anyone work when the government is going to take all the money that they make? And if no one works, the national income would be zero. This means that government revenue would be 100% of zero, or zero. This means that another point on the curve must be here.
Now let’s complete the curve. When we do, we see that the curve must have a hump. That is, it could look like this, or this, or this, but it has to have a hump. This is simply because the revenue line has to go up in the low tax-rate part of the graph and has to start going down to reach the point we drew at the 100% tax rate.
But if the curve slopes downward it implies something remarkable — something that few of those who push for higher and higher taxes want to admit. It means that when tax rates are high, if you make them higher, you’ll actually bring in less revenue to the government.
This has in fact occurred in practice. For instance, during the Great Depression, when Congress passed the Hawley-Smoot tariff bill, although the bill raised taxes on imported goods, the revenue that came from those taxes actually decreased. A more recent example occurred in the early 1980s. After President Reagan and Congress drastically reduced the tax rates on the rich, the tax revenue that came from the rich actually increased.
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Also there is the cost of managing the tax. If the rate was lower OR flat, would we need the enormous, infrastructure to administer taxation?
I used this video to teach my students logical fallacies and how to spot propaganda.
UK LABOUR GOVERNMENT HAS TO HEAR THIS
Taxation is theft.
You could have explained why higher taxes bring in less revenue. I'd guess the main thing is it takes spending money away from consumers and funds away from investors and slows down the overall economy.
Then why is the corporate tax rate at 17%? It needs to be raised back up.
You cannot have lower taxes and higher revenue. It’s impossible.
I hate when left-wingers say we need to raise taxes to have a better economy. Nowhere in the history of taxes or money has higher taxes led to a better economy.
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The current 15%-26% is way too low. Our sluggish economy started with the trump tax cuts. Kick it up to 30% again.
You lower taxes, they keep the profits, don’t give raises, don’t hire more employees, and borrow more money to increase profits next year and demand more production from the same workers at the same hours or the employees are just lazy and doesn’t want to work and shrinks the product and raises the prices on product.
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Go watch the Hillsdale College Course on Supply Side Economics, with none other than Art Laffer himself.
Sooooo, politicians increase tax rates to decrase the size of government! True libertarians!
Go Bruins!
Also massively ignoring the part where Reagan increased revenue by 19% while tripling the debt. Then he had to increase taxes 4 times after and widened the brackets so poorer ppl would pay more overall.
This is why we need to get rid of all taxes and instate a lvt a vat and a pigouvian tax.
I would argue that if the government lowers the income tax rate and property tax rate and goods and services tax rate, everyone in the nation will prosper, which will result in the people making more money, which will result in more investment, which will result in more taxes coming in. So, lower the taxes to prosper the people to get more revenue for the gov't. That way everybody wins.
economists trying to do math is very funny. One unprovable assumption you make is that the curve is continious, which is not necesarilly true, because of 2 things, firstly, it's up to you to prove it's continious, no one should assume it is, and secondly, remember that taxes are money, the governament takes money and does something with it, the willingness of a person to pay more or less taxes is based on what they get from those taxes, not just how much tax is paid
Someone show this to Chuck Todd
In Indonesia we have minimum 5% tax rate up to maximum 30% tax rate bracket for rich upper class, but people still think those rate were too high. They think 20% is enough for maximum tax bracket 🗿
Capital Gain Tax completely 0%, Dividend Tax can be lowered from 10% to 0% if you reinvest those dividend for minimum 3 years in a business or stock market.
Politicians aren't brave enough to ever rely on truth to guide them and that's probably because on average people are too stupid to be educated and vote with their gut.
Yeah, except this isn't what has happened since Reagan and Thatcher. They both destroyed the economies of the US and UK respectively with this idea when the economies were at their all time high, when, ironically, the rich were taxed more. We had 40 years to experiment trickle down. 40 years where we could only witness how the wealth of the lower class working hard 40 to 50 hours a week was being hoarded by the super rich.
Yes. If taxing producers of goods, services, and labor above 33% yields declining tax revenues, then paying non-producers 33% or more of a median income yields declining production of goods, services, and labor. If there is not already a name for this correlative economics curve, then I hereby name it the Lowen Curve!
Wouldn't it be better if there was no taxes?
"If we decrease the tax rates, government revenue 'might' rise." "Might"? BTW, who gets the money? A = Government; not you.
This is "trickle-down theory," and Supply Side Economics is more than an economic policy; it affects how we see things, i.e. the supplier vs the consumer; it creates mistrust and hostility between the supplier and the consumer; therefore, the supplier has more power and wealth; the consumer has less power and wealth.
"Extreme left wingers only goal is to make government as big as possible." This is their only goal? Pretty irresponsible statement from a distinguished economics professor, I would say, and an ad hominem.