What is the purpose of income taxes?

Let's look at the options:

1. Raise revenue
2. Reduce the disparity of income
3. Social engineering (targeted taxes and subsidies)
4. Limit the power of the rich
5. Reward political supporters
6. Punish political opponents

Which ones do you think are currently being used?

Which ones do you think are legitimate use of the tax code?

Each purpose supports a very different income tax rate and special provisions.

The current income tax is used for ALL the above. As a result it is complex and its many missions are in conflict.

If you believe that the purpose is to raise revenue, then you want a growing economy that broadens the tax base. You will want a tax rate that balances a growing economy with maximizing revenues. It is my guess that this tax rate is around a flat 10%. Could be a bit higher, could be a bit lower. But a low flat rate would spur investments and jobs and set the stage for a long term growing economy that would maximize revenues.

It is also my guess that even the poorest segment of our society would have improved lives. However, the disparity between the productive wealthy and the poor would also widen.

If the goal is to reduce the disparity of income, you will want a sharply progressive tax. This will reduce investment and job creation. It will reduce the tax base. There will be fewer rich people for sure. Perhaps it may make a statistical difference in the gap between the rich and poor.

If you believe that the purpose of the tax code is social engineering, (i.e. tax breaks for green energy) then you can reward the industries and companies you like (yes the current tax code describes breaks for companies where only one company is eligible) and punish companies you don't like (investment banks).

If you are afraid that "unfettered" capitalism will move the locus of power to uncaring business interests, then taking their money and moving it to the public sector will move the capitalists from serving their customers to serving Washington. In the last year, we have seen a sharp growth in CEO activity in Washington and growth of lobbying.

And of course, politicians always have and always will reward and punish us citizens to keep us voting for them.

Just keep in mind, if you believe the tax code is for anything but number 1, raising revenue, then you are reducing the power of the economy, moving power to Washington and creating an unfair and uncertain playing field for entrepreneurs, investors and businesses.

Your choice.

The Truth About the Deficit is Half Right

"The Truth About the Deficit" NY Times February 6, 2010

I just looked at a chart of total income tax revenues. And what a surprise! Income tax revenues went UP, not down.

http://www.usgovernmentrevenue.com/

Not only that, but after a lag, (as you would expect) the economy grew.

Entitlements are going to dwarf the GDP of the planet. If we look at the unfunded liabilities and off balance sheet obligations on every level of government, from cities to municipalities, to counties, states and the federal government...the amount of the obligations are going to dwarf our economy. And there "ain't" any reserves anywhere.

Its not taxes, it is

Raising taxes does little to raise revenue. What raises revenue is economic growth and a larger tax base. Raising taxes, reduces economic growth.

Do this thought experiment. Imagine that the federal government raised the income tax rate for everyone to 100%. That's right. Took every penny from everyone. Period. What would happen to economic growth? It would stop. The market would go in a free fall, all investments would stop. Now imagine that it reduced the taxes to 90%. Well...we might see some economic activity...and keep imagining they bring the rates down to say 10%.

At what point will we have the most economic growth? You make your guess. Mine is about the 10% number. AND, the bonus is that the total income tax REVENUE would be at it highest at this rate.

Capital gains tax revenues, for example doubled following the 2003 tax cuts.

The deficits didn't come from decreased revenues, (which dropped 2001-2004) and then exploded in 2005-2008, but from increased spending.

Year GDP-US Income Taxes %GDP
2000 9749.1 $1,211.75 12%
2001 10286.2 $1,145.41 11%
2002 10398.4 $1,006.39 10%
2003 11142.1 $925.48 8%
2004 11867.8 $998.33 8%
2005 12638.4 $1,205.50 10%
2006 13090.8 $1,397.83 11%
2007 13715.7 $1,533.71 11%
2008 14441.4 $1,450.10 10%


The Times editorial states, "The first lesson is that spending without taxing is a recipe for huge deficits, and that running big deficits when the economy is expanding only sets the country up for bigger deficits when the economy contracts. The second lesson is that once a deep recession takes hold, slashing government spending is not going to solve the problem. It will only make it worse."

Let's correct that to read, "spending without ECONOMIC GROWTH...."

Its not about tax rates, it is about economic growth. You can't tax you way to revenues. Growth is achieved with productivity. The person who can spend their own money most productively is YOU.

Cut taxes, watch the economy grow and increase revenues. And most importantly, the entitlements will have to be cut. They are sustainable. If we tax our way into a depression, and then cut entitlements we will have a revolution. Not good.

The process will be painful enough...let's make it happen during the sunny days of economic expansion.

in reference to:

"The first lesson is that spending without taxing is a recipe for huge deficits, and that running big deficits when the economy is expanding only sets the country up for bigger deficits when the economy contracts. The second lesson is that once a deep recession takes hold, slashing government spending is not going to solve the problem. It will only make it worse."
- Editorial - The Truth About the Deficit - NYTimes.com (view on Google Sidewiki)