“Oh, there they go again!” Ronald Reagan’s words echoed through my mind when I read the recent letter: “Dispelling one of the GOP’s myths”. The letter claimed that the GOP believes “revenue goes up when taxes go down”. The actual claim however, is “revenue goes up when tax RATES go down”.
Consider movie tickets. If Mr. Harkins wanted to make more money, why not raise the price of a movie ticket to $100. More money? Hardly. He would sell next to zero tickets and make next to zero money. How about selling the tickets for a penny? Lots of sales for sure but obviously little revenue. So somewhere between one penny and $100 is the optimal ticket price which maximizes revenue.
A similar situation exists with taxes. If rates are too high, middle class people have less to spend. Wealthy people will put their money into tax shelters. This contracts the economy and produces less revenue. Lower the rates to near zero and you have a situation similar to one penny move tickets. Lots of economic activity but little revenue.
So somewhere between too low and too high is the optimal tax rate.
When tax rates were lowered under Reagan, the economy expanded and tax revenue increased substantially. Larger deficits were a problem of too much spending not too little revenue. A similar situation happened under President G.W. Bush.
So the GOP is correct is correct in saying lower rates produce more revenue. Hopefully this dispels a liberal myth.