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April 30, 2007

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I'd be very interested in hearing from the economists that actually claim that a 0% tax rate is optimal (and I find it interesting that the 2nd most optimal tax rate is the same as the first, since 0% is obviously as low as possible). I guess it depends on what you are trying to optimize. The Laffer Curve suggests raising tax rates beyond a certain point decreases tax revenues. It also suggest decreasing tax below a certain point has the same effect. As far as the Laffer Curve is concerned, the optimal tax rate is absolutely not 0%.

Also, while it is fun to complain about progressive tax rates, even if we had a flat tax rate the top 50% of earners would pay the vast majority of total income taxes. That's because the top 50% of earners earn alot more than 50% of all the income earned.

Bracket creep is not a problem with Federal taxes as the tax tables are adjusted for inflation.

You state the top 1% pay 50% of the taxes. But you don't state how much wealth is owned by the top 1%. Nobody ever does. I wonder why?

This is rather marred by selective facts. Federal income tax brackets are indexed for inflation, but the AMT, capital gains, and a few others are not. Food and clothing has been falling for a century. Healthcare is up but is still a relatively small part of spending. Certainly he means 50 percent of our income, not our wealth, but since much of that is transfer payments, much of that is someone else's income. The productivity examples are flawed. They would still have the incentive to partner, they would double their income after all and taxes would only take half of that 100 percent increase. As businesses, they would have available all manner of other deductions as well. A modest doctor may make $40/hr after tax, certainly more than enough for a gardener or painter. They would be fools if they thought it worth their time. Sure the wealthy are paying more in taxes, they are making oodles and oodles more money, the top 0.1% about 100 times as much.

I applaud Marotta for taking the initiative to write some fodder for your blog, but some of these Marotta Asset Management articles give me pause. Are they deliberately presenting only one side of the picture?

I'm a big proponent of the Laffer curve as a simple means to understand the underlying theory. But this is a soft science and the system is much more complex than can be conveyed in that curve. And as Nick mentioned above, we need to know which side of the curve we're on now!

How about some counter-examples? What are the most wealthy states in the nation? (Hint, look for the highest tax rates eg it's also how the taxes are spent, and most likely good, cheap state education is a good start.) To paraphrase, the "good" use of tax revenue is returned, pressed down and overflowing. I'm not claiming a causation relationship in all cases, but the correlation should make one think twice.

I think they also have some numbers wrong. When Reagan cut federal taxes in the early 80's, federal tax revenues actually fell as a percentage of GDP, but when he gradually raised them later, revenues rose. (Marotta is probably confusing the hike in SS taxes that increased total govt revenues with vanilla fed tax revenues - a common mistake.)

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