1. Taxation effects behavior. Why do you think state and local governments tax the heck out of cigarettes? Its not to raise revenue, its to stop people from smoking. Why would taxes on income be any different? Its not of course, so the more you tax income the less of it you will get.
Look at real world examples to see that taxation effects behavior.
- Depardieu Moves to Belgium - FoxNY
- Companies Seek to Beat Obama Tax Increases - Bloomberg
- Californians Move to Texas to Escape - NBC LA
2. The Laffer Curve is a model of the relationship between tax rates and tax revenues. The gist of the theory is that there is an ideal tax rate that will maximize revenues. A rate higher or lower than this ideal rate will lower revenues. So the million dollar question is, "What is the ideal tax rate?" In this video which does a great job of explaining the concepts of the Laffer Curve two liberal economists from UC-Berkeley put the hump on the curve at 33%.
So what does that mean? It means that no liberal should ever ask for tax rates higher than 33% (good luck with that). But is that really the correct percentage? I'd argue no, that number is too high, and here is my evidence backing it up. This most recently happened in 2003 when President George W. Bush cut the dividend rate to 15%. Reported dividends jumped from $103 billion in 2002 to $193 billion in 2003. So cutting the rate nearly doubled the government take. Conversely, in 1986 when capital gains rates went from 20% to 28% tax revenue dropped from $52.9 billion to $33.7 billion.
What does that tell us? Let's examine the data. First, let's look at when the rates went from 20% to 28%. The revenue generated went down. So there are two possible scenarios here. The first one is that 20% is to the left of the hump (near the apex) and 28% is on the right side of the hump, but below the revenue generated at 20%. The problem here is when we add the second data point from the Bush tax cuts. Here we see that a cut from 20% down to 15% doubled government revenue. If the 20% rate were to the left of the apex of the curve, then lowering the rate should reduce revenue, but it did not. So 20% has to be to the right side of the apex. Without more data we can't determine whether 15% is on the right or left side of the apex, but we can confidently say that 20% is on the right side, meaning the ideal tax rate from a revenue generating standpoint has to be less than 20%.
