Thursday, November 11, 2010

Even more on Radical Tax Reform

I was asked a question about tax rates on another forum. Here is the question and my answer:

What do you think the tax rate that maximize revenue is?

Great question and it depends on circumstances, including what kind of deductions (loopholes) we have. Today, we have deductions that don't contribute to the overall health of the country.

Federal tax revenues have ranged from a little over 17% of GDP to a little over 19% of GDP for a few decades. This includes when the top rate was 70% and when the top rate was 28%.

Bush lowered tax rates without eliminating tax deductions. Reagan never did that. When Reagan lowered tax rates twice (top rate went from 70% to 50% in 83 and then to 28% in 86) he also eliminated deductions.

After Reagan, tax rates increased and more deductions proliferated. We had a recession. Then Clinton / Gingrich cut the capital gains rate. We had an economic boom as a result.

The problem today is that most politicians are economic illiterates. The left says punish the "rich" with high taxes and the government will have money to spend on "social justice". The right claims that cutting any taxes will stimulate an economic boom. Neither of these positions is correct.

The best approach is to lower tax rates and reduce tax deductions. Reagan believed this. Bill Bradley believed this. Jack Kemp believed this. Jerry Brown believed this. And now Obama's debt commission believes this. It's a bi-partisan belief. Economic illiterates don't understand this. They are in control. That's the problem.

I will trade tax deductions for lower rates any time. I will also trade consumption taxes for taxes on innovation and production anytime. These are the right things to do for the country. Unfortunately, there are politicians who are either too stupid or too power hungry to do this. That's the problem.

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