Will Higher Tax Rates Balance the Budget?

As the U.S. debt and deficit grows, some politicians and economists have called for higher tax rates in order to balance the budget. The question becomes: when the government raises taxes, does it actually collect a larger portion of the US economy?

Professor Antony Davies examines 50 years of economic data and finds that regardless of tax rates, the percentage of GDP that the government collects has remained relatively constant.  In other words, no matter how high government sets tax rates, the government gets about the same portion. According to Davies, if we’re concerned about balancing the budget, we should worry less about raising tax revenue and more about growing the economy.  The recipe for growth? Lower tax rates and a simplified tax code.

7 Comments

  1. Matt Wavle

    The ending statements say it all: 18% of a Big pie is much more $$ than 18% of a small pie.  How do you grow a bigger pie?  Easy:

    1. Lower Tax Rates
    2. Simplify the Tax Code.
    (one can only hope)
  2. Brian Phillips

    Raising taxes on higher income earners is nothing more than political theater meant to buy votes.  They know it will have no effect at all on actual government revenue.

  3. asexymind

    lower tax rates and a simplified tax code = bigger pie more growth, opportunity, innovation, well, quality of life period seems pretty good to me!

  4. kevinbuttrum

    I say abolish the income tax along with the I.R.S, and enact a Federal Sales Tax on everything except unprocessed food. The more you spend, the more your taxed. The more you work and save, the more money you have.

  5. Lukas Koube

    interesting facts, i didn’t know that the governments revenue stayed so stable over time, irrespective of tax rates. i knew that people modified their behavior based on changes to the rules, but this is a very neat piece of empirical evidence. 

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