Everyone should recognize the main lesson of the Laffer Curve.  That lesson is that higher tax rates create higher disincentives to do the taxable exchange.  Higher tax rates result in decreasing collective incomes.  A complete understanding of the Laffer Curve should compel everyone to keep the rates as low as possible.
Let’s look at a small community of 100 people of varying incomes, resulting in an $1,000 economy at a 20% tax rate.  If Government needs $200, they do not do a head tax of $2 per person, they do a 20% tax.  Now if government exempts $200 of the income and allow $200 of deductions and give everyone a $.50 tax credit (equaling $50) then the tax rate of 20% will only result in $70.  $200 is still needed so the tax rate would have to rise to 41.66% in the static analyze.
The Laffer Curve teaches that a 27% lower GDP would result and the 41.66% tax bringing in $87 of tax revenue. ($730 GDP minus $400 exempt and deductions equals $330 taxable income times 41.66% equals $137 minus $50 of credits equals $87.  Higher tax rates have worse results. 
Let’s look at the math on smaller deductions, exemptions, and credits.  Let’s half the previous example at $100, $100, and $25. At 20% rates, the results are $135 of tax revenue. ($1,000-200) x 0.20 = $160 -$25=$135 of tax revenue.  Doing the math with the Laffer Curve logic, the tax revenue maxes out at 40% with only $195 collected.  The 40% versus the 20% drops GDP by 25%. 
Let’s reduce the deductions and exemptions to a total of $125 and keep the credit at $25.  Doing the math, the tax rate needs to go up to 30% dropping the GDP 12.5% to $875.  The taxable income is now $750.  At 30% that is $225 then take away the $25 credit to equal the $200 needed for government. 

This means to just get 12.5% of GDP worth of deductions and exemptions and then 2.5% of GDP of a tax credit means a reduction of overall incomes (GDP) of 12.5%
To get the 20% of GDP worth of deductions and exemptions and then 2.5% of GDP of a tax credit means a reduction of overall incomes (GDP) of 25%.  (Tax rate increasing from 20% to 40%.) and we still were a little shy of the tax revenue needed. 

To get the 40% of GDP worth of deductions and exemptions and then 5% of GDP of a tax credit means never coming close to being able to raise rates enough to reach the $200 or the tax revenue at 20% without the deductions, exemptions, and credits.  
If government NEEDS a certain amount of money, the best practice is to take the amount needed and divide it by the greatest possible tax base.  That results in the lowest tax rates.  If there are current deductions, exemptions, or credits, eliminate them and lower the tax rates to match.  
Over time, the GDP growth rate will increase allowing further rate decreases. Certainly, we need some government, however after a 20% tax rate, the negatives of decreased GDP certainly outweigh the extra government revenue.  Total of all government tax rates, meaning spending should max out at 10% of GDP.


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    Bill Haley

      Bill Haley started Haley2024 in the spring of 2013 in an effort to his part in restoring freedom to America.


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