Maybe it is rocket science
Craig Newmark points us to the Telegraph's coverage of a paper asserting the imminent bankruptcy of the US. A section in the article caught my eye:
The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.
Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes.
Now, I'l be the first to admit that I'm neither an economist nor a rocket scientist, but the myth that an increase in tax rates has a long-term, linear correlation to an increase in tax revenues, is surprising to see. Imagine, if you will, that we increased the tax rate to 100%. I doubt anyone believes that the following year, we would see a corresponding increase in tax revenue. That's one extreme case, of course, but it helps start the issue.
The problem, of course, is that it's easy to say, "The tax base is X, the tax rate is y%, so we brought in Xy/100 this year. If the tax rate had been 2y, we would double our revenue to 2Xy/100." This ignores two basic inputs: reinvestment, and incentives. Incentives is easy - I'm willing to work twice as hard to make a lot more money. If, instead, working twice as hard only brought in 20% more money, I might choose not to - and now, there is no tax on what would have been increased output. Hard to measure, but there. Reinvestment - or more simply - growth - is easier to look at. The more money the government skims off every transaction, the fewer transactions there will be. The fewer transactions there are, the fewer times the government can take its cut. And, of course, the more people will be unemployed (if everyone stretches out their car purchases by an extra month, that's fewer cars being sold, and thus fewer car salesmen that each dealer needs).
In orbital mechanics, you can see the same effect. If you want to orbit faster, slow down; if you want to orbit more slowly, speed up.
Note: I haven't actually read the paper yet; but the quote caught my eye. If we doubled the tax rate, we would not have a long term doubling of tax revenues.
