Why higher tax revenue?

Today third quarter estimated federal taxes are due. When people have to pay their taxes themselves, that makes them more likely to consider the rate and its purpose.

Conservatives, of which I am generally one, have had an interesting approach to tax policy for a few decades now. During the Reagan Administration, Arthur Laffer introduced his famous curve. The basic premise is government tax revenue would be $0.00 if the tax rate were 0% and if it were 100%. Somewhere in the middle it reaches a high point. Then, the 0% point, peak, and 100% point form a curve of expected tax revenue based on the tax rate.

This was developed at a time when the top income tax rates were well north of 50%, presumably on the far side of the curve when it was nearing 100% and revenues would be heading to $0. The conclusion, then, was if tax rates were reduced, that would move the revenue point on the graph back which would move the amount of revenue up the curve. That is, with the government taking less money, people are free to spend or invest more, the economy grows accordingly, and as the economy grows, the government tax percentage grows with it—higher revenue with lower tax rates.

Where that high point is on the curve—that is, what tax rate produces the most revenue—has been the point of much debate over the years. Democrats agree that as the economy grows, revenue goes up. The disagreement is about the cause. This post is not an argument in that debate. The purpose of this post is to ask questions about each side's assumptions and conclusions.

Conservatives tend to perpetually believe that lower tax rates will produce higher revenue. Let's assume that's true. Why do conservatives, who want smaller government, push for something that would produce bigger government revenues?

Considering we've been running large deficits for some time now, and our national debt is substantial, there are good reasons to have surplus government revenue for a time—to fix these problems. President Andrew Jackson called the national debt a national curse. He was right: “the borrower is servant to the lender” (Proverbs 22:7).

Operative questions for us now:

1. Would raising tax rates raise government tax revenues?

2. If government tax revenues increased, would that be used to make government smaller or bigger?

When I was growing up, I remember a local businessman telling our family, “Never vote for a tax increase.” There were a few reasons for this: • Once taxes go up, they never come back down. • Government should be able to accomplish its purposes with the revenues it already has.

That approach has been formalized into a powerful political tool. Americans for Tax Reform sends a Taxpayer Protection Pledge to all candidates for public office. It is far-reaching. The organization considers the pledge valid in perpetuity for any time a person ever again stands for public office. It also has places for witnesses to the pledge to sign.

ATR enforces the pledge by publicly shaming anyone who breaks it. Enforcement is not uniform, but is based on whether or not a policy change is revenue-neutral or not. While this may sound like a mitigating circumstance, it is not a minor exception. Revenue-neutral may mask the net result of the change, but someone somewhere felt the impact of a tax increase even if ATR didn't consider that tax increase a violation of its pledge.

Even wealth redistribution policies, like the Affordable Care Act, could be considered revenue-neutral, and yet the net effect in taxes go up for the top third while they go down for the bottom two thirds. Repeal of the Affordable Care Act would be a net tax increase for the bottom two thirds of the population, yet no one who took the ATR pledge was being held to account for their (good) votes for repeal. (ACA's demands on insurance policies render health insurance tax credits irrelevant in the face of skyrocketing premium increases. Net tax-and-premium out-of-pocket expenses for citizens is higher than without it. The ATR pledge does not take insurance premium expenses into account for the tax pledge.)

Conservatives correctly oppose wealth redistribution policies. They also need to take care that they do not directly, indirectly, or inadvertently oppose their repeal or take pledges that could block their repeal.

Sometimes activists in favor of smaller government support and promote the Taxpayer Protection Pledge for purposes of “starving the beast.” That is, politicians have been elected on promises of shrinking the size of government only to see those promises evaporate once they establish a voting record. Given the lack of success with an electoral strategy, some have turned to a fiscal strategy instead. The thinking goes, If we can't get politicians to stop spending, we'll take away their ability to spend by taking away their ability to raise revenue.

There are a couple problems with this. • For one, a lack of funds has not slowed down spending and spending increases. • Two, this strategy is entirely financial; it's not based on principle. Until the strategy is based on articulating principles of good government and basing the size (both activity and fiscal) on that, the fiscal strategy is limited in its effectiveness. Some may object saying voters don't make decisions based on principle. Maybe many don't, but some do, and they have a lot of influence over other voters. Our time demands leadership, not just popularity.

As we grapple with the consequences of bad governing, it's important not just to deal with the subsequent consequences or to reverse them, but to ensure that we return to good governing based on solid foundational fundamental principles.