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Monday, December 20, 2010

The Tax-Rate Debate in Perspective

Over many decades the total federal take from taxation has been quite steady: just under 20 percent of GDP. (It dips during recessions, of course.) This tells us that people — surprise! — adjust their behavior to the tax rates and as a result the haul stays about the same. So the fight over rates isn’t really about revenue or deficits. It’s a signaling game. One side signals it cares about fairness or fiscal discipline by calling for higher rates on the rich; the other signals it cares about economic growth or “the free market” by opposing higher rates. Either way, the government will take in about the same amount of money and the amount of resources appropriated and consumed by government (total spending) remains the same or grows. This is not to say that higher rates are harmless. The evasive action they stimulate is economically inefficient. For example, tax lawyers are paid big bucks to find ways around the taxes when that money could be producing something of value to consumers.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.