Quote:
Originally Posted by HarryT
Perhaps if tax evasion were not so widespread, state finances would be in a better shape?
|
Only in theory.
In practice, when the government collects an extra $1.00 in revenue, it increases spending by $1.20 or thereabouts. Every now & then I see a study that claims this, at any rate. And it sure seems to be true - Illinois raised taxes this year to "pay the deficit" and next thing you know, we have a budget that spends even more than last year.
Dealing with government spending more than it takes in is not a simple task, because of this kind of perverse effect of what appear to be obvious remedies.
For example, most people (generally but not always liberals) seem to think that if you want to collect more money for the government, all you have to do is raise the tax rates. But actual experience shows that if you want to collect more money, it is often better to lower the tax rates. There are lots of reasons for this - one is that when you lower taxes, business have more to spend on making things, which increases their profits, so they wind up paying more tax on the increased profit than they would have paid before. Another is that when you lower rates, it makes tax evasion or avoidance less profitable, so more people actually pay.
I think that there's a kind of psychological sweet spot in the overall tax rate which maximizes the revenue that can be collected. I believe it to approximate just under 20%, which interestingly, as a rabbi explained to me once, is what the ancient Hebrews collected by imposing a tithe. The trick was, they collected the tithe twice a year. I don't know if that's true, but I wouldn't be surprised if it were, because surveys routinely show 20% as an amount that people regard as a fair tax to pay.