If I live to be 100 years old, I suspect I’ll still be futilely trying to educate politicians that there’s not a simplistic linear relationship between tax rates and tax revenue.
You can’t double tax rates, for instance, and expect to double tax revenue. Simply stated, there’s another variable – called taxable income – that needs to be added to the equation. This simple insight is what gives us the Laffer Curve.
This is common sense in the business community. No restaurant owner would ever be foolish enough to think that revenues will double if all prices increase by 100 percent. People in the real world know that this would mean lower sales.
At best, revenues will rise by much less than 100 percent in that scenario. And if sales drop by enough, revenues may actually fall.
Perhaps because so few of them have business experience, it seems that politicians have a hard time grasping this simple concept.
Photo Credit: 401K 2012 (Creative Commons)