Tax
The money that we pay to the government that is used to provide public services and pay for government institutions.
Tax rate
The ratio (usually expressed as a percentage) at which a business or person is taxed. For example, you might be in a 15% tax bracket which means that 15¢ of your next dollar will be taken in taxes.
Revenue
The actual dollars collected through taxation.
Tax Capacity
The capacity, or amount, that an economy can be taxed before revenues drop because of disincentive.
Discussion about taxation is important. There are deeply held beliefs on both sides of the aisle. It can be useful to look at the different beliefs side by side.
| Liberal | Conservative |
|---|---|
| Wants a safety net. | Wants a safety net |
| Defines the amount of taxation based on the perceived need. | Defines the amount of taxation based on what the economy can afford. |
| Envisions a predefined or relative desired standard of living for the citizen and anything beyond that is seen as excess and open to high taxation or confiscation. | Believes that high earnings are OK as long as they are legally and ethically obtained. |
| Sees welfare as mandatory. | Sees welfare as charity. |
| Believes society has a moral obligation to provide assistance to the poor and unfortunate and that government is the correct vehicle for this giving. | Believes society has a moral obligation to provide assistance to the poor and unfortunate and that churches and private sector charities are the correct vehicle for this giving. |
| Strives for equality of outcome. | Strives for equality of opportunity. |
| Believe that incentives do not matter. That is, if the earnings of an individual above an arbitrary threshold are taken through taxation, the person will continue to work just as hard for others as he does for himself. | Believe that incentives do matter. That is, if the earnings of an individual above an arbitrary threshold are taken through taxation, the person will not continue to work just as hard for others as he does for himself. |
| Uses an static scoring model. That is, there is a linear relationship between the tax rates and tax revenue. | Uses an dynamic scoring model. That is, behavioral responses preclude a linear relationship between tax rates and tax revenues.* |
| There is enough money held by the rich to pay down current deficits. | There is not enough money held by the rich to pay down current deficits. |
*The following videos are very good at explaining how a dynamic model affects how one views the relationship between tax rates and tax revenues:
Static v Dynamic Vid 1
Static v Dynamic Vid 2
It is possible to raise tax revenue by lowering tax rates. During the Reagan administration, two things happened: tax RATE cuts and the elimination of certain tax loopholes, preferences, and exemptions. The rate cuts incentivized economic growth by not taking large portions of the next dollar earned. By eliminating many of the loopholes, preferences, and exemptions the tax base, or number of people paying taxes, was increased. These two concepts together had the effect of RAISING revenues.
The dynamic model acknowledges that incentives matter. The static model says that incentives don't matter and that production and capital investment will remain unchanged even if tax rates change.
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