Yesterday in the Wall Street Journal, Art Laffer published an opinion piece entitled "The-Soak-the-Rich Catch-22" which offered evidence from history that increased tax rates have actually led to lower tax revenues as a percentage of GDP. He also demonstrates that higher tax rates have historically led not just to lower revenues as a percentage of GDP but also to lower GDP growth rates and lower overall GDP -- "a double whammy," he calls it.
This is the important distinction we pointed out to readers in our post last week "Lower tax rates stimulate growth."
Art's piece opens with a quotation from President Kennedy's Economic Report of the President from January 1963: "Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today's economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues."
These are important points, because the primary argument from those who want to raise tax rates is that we "can't afford" lower tax rates. The point of Art's article is that tax rates influence behavior, and that higher tax rates lead to lower growth, fewer jobs, and less tax revenue.
We realize that if tax rates were lowered to zero there would be no tax revenues at all, but we wish that all the politicians would similarly realize that keeping tax rates low stimulates the growth that President Kennedy describes as the "best way open to us to increase revenues." Is "taxing the rich" so important that it is worth sacrificing growth, jobs, and revenues? As we have demonstrated in previous blog posts, it is precisely the rate on the highest tax bracket that has the greatest impact on the business and venture investment that drives economic growth.
This is such an important point that it bears repeating.
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