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Tax rates and tax revenues revisited

February 1, 2017 | Commentary

  • As the new administration takes office there is considerable discussion surrounding reshaping U.S. personal and corporate income taxes. This discussion invariably leads to speculation about how any new program will impact tax receipts and the federal deficit.
  • There is no simple relationship between tax rates and revenues collected. Tax rates change incentives to work or invest, but many other features of the tax code are at least as important in determining economic activity and total revenue.
  • Every time there is a discussion of revising the tax code someone trots out the Laffer Curve to support or attack the proposal. The Laffer Curve has been around for over 40 years because it is one of the great generalizations in economics. It lacks, however, enough specificity to be of much use in debating among various tax plan proposals.
  • Whatever ultimately arises as tax reform in the new administration will matter. Early stock market returns suggest considerable optimism that the changes will be supportive to income and investment. It remains to be seen whether what results is as consequential as the Reagan tax reform from 30 years ago or as insignificant as virtually all the changes since.

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