Tax Rate Vs Tax Revenue

Does increasing tax rates increase tax revenue? Well yes and no. On one hand of course increasing tax rate increases revenue but only for a very short period. The history of tax in USA has shown a very distinct pattern. When tax rates are increased tax revenue climbs and then goes down. On the other hand when tax rate is reduced the economy takes leaps forward. If you need evidence then here are some of the more famous tax reductions in the history of the US.

In 1920 the Secretary of Treasury a man called Andrew Mellon told America that the history of tax’s shows that high taxes are not paid. If you put high taxes on someone this will encourage him to withdraw his money from investing in business. For if you are investing a business you are in a way essentially taking a bet. If you win the bet and the business is successful then you get money however because of taxes you get less money then you would have gotten if there were lower taxes. But if you lose the bet and the business is not successful then the full risk has not been reduced. So on average it becomes unprofitable to invest in business.

As they draw their money out of business they begin putting into tax-free securities or try to find other law-abiding ways of avoiding tax. Since this happens the sources of money that the government puts taxes on begin to fade away and the people to as a whole also begin to lose sources of income.

So the secretary of treasury was able to reduce taxes substantially. Where before tax rates were over 70% he now reduced it to under 25%. But unlike you would expect with the revenue decreasing as well. Revenue increased amazing 61%. With before revenue being $719 and then after 1920 being $1164.

This happened again when John, F, Kennedy was the president. He saw the same thing that Andrew Mellon saw and reduced the high taxes that were put under the presidency of Roosevelt and Hoover. He decreased tax rates from 90% to 70% and right after that tax revenue increased over 33%.

So why does the history of taxes are stilling having these ridiculous tops and bottoms? Simple when a politician reduces the tax rate and tax revenue climbs the government begins to spend more money (obviously when you have more money you spend more money) but then the government over stretches itself and decides to increase taxes as they need more money temporarily. But then of course we all knows what happens in the long run this hurts the economy.

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