{"id":1147,"date":"2009-04-26T22:02:02","date_gmt":"2009-04-27T06:02:02","guid":{"rendered":"http:\/\/hodakvalue.com\/blog\/?p=1147"},"modified":"2009-04-28T12:21:25","modified_gmt":"2009-04-28T20:21:25","slug":"why-raising-the-tax-rate-doesnt-raise-tax-revenue","status":"publish","type":"post","link":"http:\/\/hodakvalue.com\/blog\/why-raising-the-tax-rate-doesnt-raise-tax-revenue\/","title":{"rendered":"Why raising the tax rate doesn&#8217;t raise tax revenue"},"content":{"rendered":"<p>Here&#8217;s a simple thought experiment.\u00a0 There are ten people.\u00a0 They have an income distribution and a tax bill that look like this:<\/p>\n<p>#\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Income\u00a0\u00a0\u00a0 Tax \u00a0 \u00a0\u00a0 Effective rate<\/p>\n<p>1 &#8211;\u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0\u00a0 50\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30%<\/p>\n<p>2 &#8211;\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 5\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25%<\/p>\n<p>3 &#8211;\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 8 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1.5\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 19%<\/p>\n<p>4 &#8211;\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 6 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0.8 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 13%<\/p>\n<p>5 &#8211;\u00a0\u00a0\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0.5\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10%<\/p>\n<p>6 &#8211;\u00a0\u00a0\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 4 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0.2 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 5%<\/p>\n<p>7 &#8211;\u00a0\u00a0\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0 0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0%<\/p>\n<p>8 &#8211; \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 2 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0%<\/p>\n<p>9 &#8211;\u00a0\u00a0\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0%<\/p>\n<p>10 &#8211;\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0%<\/p>\n<p>Total \u00a0\u00a0 \u00a0 100\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 23\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 23%<\/p>\n<p>In other words, our little group roughly represents the distribution of income\u00a0 and income taxes in many developed countries.\u00a0 Now, let&#8217;s say that the government wanted to raise additional income by raising the top marginal rate, which would be felt exclusively by the top earner.\u00a0 Let&#8217;s say the effect of that increase would raise his tax from 15 to 16, or his effective tax rate from 30% to 32%.\u00a0 That would boost overall tax revenue from 23 to 24, a 4.3% gain.<\/p>\n<p>Now, 4.3% would be considered a huge gain in total income for a government from just a tax rate increase.\u00a0 Here is why they would not be likely to see it.<\/p>\n<p>Wealthy people <a href=\"http:\/\/business.timesonline.co.uk\/tol\/business\/industry_sectors\/banking_and_finance\/article6169324.ece\">are sensitive<\/a> to their effective tax rates as much as the rest of us, and possibly more (they didn&#8217;t get wealthy by being indifferent to money).\u00a0 The wealthy and their income are highly mobile in every country except the <a href=\"http:\/\/hodakvalue.com\/blog\/?p=244\">U.S., Libya, and North Korea<\/a>.\u00a0 All it would take is a 7% chance of the top earner decamping for, say, Switzerland to make this tax increase <em>lose<\/em> money for the government on an expected value basis.\u00a0 When things get too far out of whack, high-tax nations have <a href=\"http:\/\/www.stopsmilingonline.com\/story_detail.php?id=1127\">a lot to worry about<\/a> on this score.\u00a0 And that is before counting any effects on marginal productivity.<\/p>\n<p>If a country&#8217;s tax rates were at some equilibrium, it would most likely be the equilibrium for maximizing the country&#8217;s tax revenues.\u00a0 I don&#8217;t know if any country is exactly at that point, but it&#8217;s unlikely that any country is on the strongly upward-sloping part of the <a href=\"http:\/\/en.wikipedia.org\/wiki\/Laffer_curve\">Laffer Curve<\/a>.\u00a0 All of which probably explains why overall revenue seems <a href=\"http:\/\/4.bp.blogspot.com\/_djgssszshgM\/RxTY5EetITI\/AAAAAAAAAI4\/_2KgpAHBs-s\/s1600-h\/personal+current+taxes.gif\">relatively insensitive to individual tax rates<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Here&#8217;s a simple thought experiment.\u00a0 There are ten people.\u00a0 They have an income distribution and a tax bill that look like this: #\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Income\u00a0\u00a0\u00a0 Tax \u00a0 \u00a0\u00a0 Effective rate 1 &#8211;\u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0\u00a0 50\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30% 2 &#8211;\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 5\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25% 3 &#8211;\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 8 [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"class_list":["post-1147","post","type-post","status-publish","format-standard","hentry","category-unintended-consequences"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1147","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=1147"}],"version-history":[{"count":7,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1147\/revisions"}],"predecessor-version":[{"id":1170,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1147\/revisions\/1170"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=1147"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=1147"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=1147"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}