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cipherpunk points at Greg Mankiw's explanation of the long-term result of what seems a small tax increase.
That's the small-scale personal effect. But the large-scale effect is just as bad. Economists have calculated that the optimal long-term tax rate is between 10% and 13%. Any higher, and while you get a short-term boost in tax revenues, the tax burden slows the economy to the point that long-term tax revenues drop. So next year, or five or ten years down the road, you realize that you're worse off than you started, to which the government answer is to raise taxes again, because they can never actually manage to cut waste and spending.¹
A 1994 report from the National Center for Policy Analysis on optimal taxation and the optimal size of government, concluded the following:
What is this optimal level of government? A reliable econometric model developed for this study finds that:
- In order to maximize economic growth, the average rate for federal, state and local taxes combined should be between 21.5 percent and 22.9 percent of gross national product (GNP).
- Taxes as a share of GNP have not been in this range since 1949.
Real GNP increased at a compound growth rate of 3.5 percent per year from 1949 to 1989. If an average tax rate of 23 percent had been in effect throughout the 40-year period, the growth rate would have been 5.56 percent per year. As a result:
- Real GNP would have been $13.6 trillion by 1989.
- The average American family would have twice as much real income today as it actually has.
Would Americans have had to sacrifice important government programs in order to keep the overall tax rate down? Not at all. At the lower tax rate, higher growth would have produced more government revenue than the amount government actually collected at higher tax rates. Specifically:
- At a tax rate of 23 percent, government at all levels would have collected $11.6 trillion more in taxes.
- This is enough money to have funded all actual spending programs enacted during that period with no public debt.
Any questions?
After the Soviet Union imploded and the Berlin Wall came down, there were a lot of people cheering and patting themselves on the back that we'd won the Cold War by forcing the Soviets to spend themselves into economic collapse. But when you look around, it sorta looks like we did the same thing ourselves. It just took us a little longer to get there, is all.
And our government is still ballooning. We have an advanced case of malignant metastatic government, and it's draining us dry.
[1] The budgeting process for government agencies actively discourages efficiency, because if you manage to save money this year, it just means you have a smaller budget next year. So then when you need to spend some money, you can't get it.
