In my explanations of the Laffer Curve, I’ve shown evidence that high tax rates discourage productive behavior and boost the underground economy.
And if higher tax rates are sufficiently onerous, the resulting reductions in taxable income can completely offset the revenue-generating impact of higher tax rates. Indeed, this is what’s already happened with the “Snooki tax.”
And the same thing happens in reverse. If lower tax rates lead to a big enough increase in taxable income, the government actually collects more revenue – which is exactly what happened when the top tax rate was lowered in the 1980s.
I’ve also tried to explain, shifting from economics to philosophy, that confiscatory tax rates are unfair and immoral. And I’m glad to see that most Americans agree, with 75 percent of all people saying that nobody should ever face a tax rate of more than 30 percent.
Notwithstanding that polling data, though, I fear that many people don’t really understand the economics of taxation. So I’m happy to share this little story that periodically winds up in my inbox.
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this…
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.
“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20?. Drinks for the ten men would now cost just $80.