Posted by: Rational Voice | December 23, 2010

Taxes and Government Revenue

Depending on where you get your news and “facts” from, you may believe that higher taxes equate to higher government revenues. That may be true for a year until those same taxes stifle productivity, job creation, investment, and overall economic growth. It’s the exact opposite with cutting marginal tax rates. Government revenue may fall from the start but will start increases as people and businesses have more money to increase economic productivity, invest, and to create jobs. All of this effectively allows more wealth creation while also increasing the overall tax base. To illustrate my point that higher taxes in fact decrease government revenue, in case my other pieces explaining this didn’t somehow work, I’d like to share a few pieces from the news  in the past few week and provide some explanation.

In Fiji, the government, as the this article points out increased taxes on the company that bottle “Fiji Water” to “15 cents per liter on companies extracting more than 920,000 gallons of water a month — up from the current one-third of one percent rate. Fiji Water is the only company extracting that much water.” In doing so, the owners of the company said they had no choice but to shut down operations. If they shut down, the Fijian government will no longer receive any tax revenue from the company, obviously cutting down on government revenues. Not only that but by shutting down, hundreds of workers will be out of a job, thereby decreasing the overall tax base. With no income, there’s nothing to tax. In fact, them being out of work may put further strains on the new decreased government coffers, especially if they provide all sorts of unemployment benefits. This just proves once again how increased taxes stifle economy growth and production. Instead of the company expanding, it shut down. If the Fijian government wasn’t so greedy, they’d still have that money flowing into their treasury but instead that steam has dried up.

Note: The owners of Fiji water, after meeting with the military dictator of the island nation, agreed to accept the tax (or was probably strong armed into doing so) days later, saving the jobs. Undoubtedly though, it will be harder for company to hire new workers or expand operations since their profit margins have been cut considerably by these taxes.

For my next example, let’s journey away from the island paradise of Fiji to the liberal bastion of New York. There, in an effort to punish smokers and push them to quit while simultaneously expanding programs wholly dependent on revenue from cigarette taxes (yea, I know, they didn’t think that one through but they’re liberals so what do you expect?), they’ve raised taxes on cigarettes to the point were in many cases the price of a pack with taxes is now at least double, and in some cases triple, that of the pack itself. In doing so, the state forced people into the black market to buy cigarettes where they avoid the insanely high taxes (I hate smoking myself but I don’t agree with singling out a specific group. It’s their life and if they choose to kill themselves with them, fine). Taxed cigarette sales have fallen by about 27% while the black market has surged. People now get their cigarettes from Indian reservations where they are are no cigarette taxes or they go to neighboring states where the tax is considerably less. This, once again, means less revenue is heading to the state treasury. In the cases where people are traveling to neighboring states where the taxes are lower, the revenue collected from those lower taxes has to be going up. Again this shows that government overreach through taxation has the opposite affect as was initially intended.

Yesterday, the Census Bureau released the results of the 2010 census. With those results came the news that the fastest growing states in the Union were those that had no income taxes. A side effect of that growth also means more seats in the United States House of Representatives. Many of these states are also Red states. Coincidence? I think not. People and businesses are flocking to these states because they get to keep more of their money. With the influx of people and an expanding state economy, government revenues are going to increase just the through sheer volume of business being done, not through increased tax rates. Also, with a broader base and people with more money in their own pockets, they’re going to buy more. Revenue from sales taxes will also increase because there are more people buying more things because they’ve been able to keep more of their money and therefore have more disposable income to spend on what they want, instead of just handing it over to the government.

It’s all really simple. If you want less of something, you tax it. That’s why health nazis have placed onerous taxes on cigarettes, because they want to curb consumption. The same holds true for taxes. The higher the taxes, the less revenue you’re going to get. People will find ways around paying taxes, either by moving to a state where taxes are lower, by finding tax shelters, or through any number of ways. New Jersey, for example, saw $70 billion of wealth leave the state because of high taxes. With the wealthy moving out of the state, the tax base decreases and the wealth base of that tax base decreases dramatically, forcing the government to place a larger burden on those who have significantly less money in order to try to keep revenue the same. Not to mention that with that money the leaving the state, jobs are leaving as well, forcing the government to try to pay out more benefits to the unemployed with less revenue coming in. It’s a destructive cycle that hurts the middle and lower classes more than anything else and it’s not the rich peoples’ fault. It’s the government’s. If anything, every state should be courting the rich and companies to come through lower taxes. That way more of the burden falls on the rich (though they’ll still get to keep more of what they earn at the same time), even with the lower rates, taking much of the burden away from the poorest in each community, providing them jobs and helping them to grow and prosper as well since they’ll have more money to save, invest, pay for school, increase their own standard of living, etc., all helping make them more self-sufficient and less reliant on the government. That’s what lower taxes does. It allows people to keep more of their money. It empowers them because they no longer need government assistance. Liberals will never allow this though. They are reliant on keeping people needy and playing the class warfare card while providing more benefits to them under the guise of compassion and the expense of those who actually work instead of helping them to raise themselves up and out of their poverty. That is the essence of a liberal. The essence of a conservative is to empower people and help them to become more self-reliant. As they become more self-reliant, they’ll be able to earn more money, increase their standard of living, and enjoy life more. They won’t need handouts but rather will be able to help those less fortunate through charity. Much of doing so simply starts with allowing people to keep more of their own money.

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