Wednesday, May 18, 2011

Tax Rates do NOT determine Tax Revenue

Nowhere in that formulation do we see a place for tax rates, as the amount of tax collections from year to year seem to be virtually independent of this factor.

In fact, since 1967, the federal maximum income tax rate has ranged from a high of 77% (in 1969) to a low of 28% (in 1988) before rising back up to today's 35%, while payroll taxes have steadily increased from a combined employer and employee rate of 6.4% to 15.3% of income over all that period of time.

Our relationship then, if it holds up, suggests that the best way for the federal government to increase its tax collections would be to promote things that either increase real economic growth or that boost median household income.

And if the government really wants to balance the federal budget and get the growth of the national debt under control, it really needs to focus on reducing its spending.