The best way to boost growth? Cut those tax rates
There has been much confusion in the political discourse of this election cycle regarding the relationship between tax rates and overall tax revenue. Some clarification is in order.
First of all, when politicians speak of “raising taxes,” they usually are referring to elevating the percentage rates of taxation (on income, sales or property). Such an increase in rates, however, paradoxically can lead to a decline in overall tax revenue to the government, which is the opposite of the intended effect.
A simple metaphor illustrates this:
Suppose you own a small coffee shop and the “rate” you charge for a large cup of coffee is $2. Your business falters as you struggle to draw in customers. You find yourself not making enough money to pay even the lease on your space. How can you go about increasing your sales revenue?
A liberal mindset says, “You're not charging enough for the coffee! You're broke and your customers are not. Raise the rate! Make them pay $3 a cup!”
You can certainly try this — and bring in more revenue per cup — but you'll probably only drive customers away and decrease your sales revenue because you'll be selling a lot fewer cups. You can't force your will to be profitable onto consumers.
The conservative mindset says, “Charge less, and perhaps you'll sell more!” The liberals respond, “That's absurd. How are you going to pay for such a rate cut?”
The liberal retort is nonsensical.
If you sell me a large cup of coffee for $1 instead of $2, you don't have to “pay” anyone for this, nor do you have any additional expenses as a result. How low you go is constrained only by your desire to make a profit.
At a lower price per cup, you may sell a lot more coffee as you draw in customers with your ultra-competitive price that undercuts the chain stores'. If you charge half the price but sell three times the volume, you're going to bring in 50 percent more revenue.
Taxation works in a similar way.
Think of the economy each year as a pie, of which the government gets a slice through taxes. Which is better for the government (and the economy): to receive a thinner slice of a big and rapidly growing pie or to receive a thicker slice of a small, shrinking pie? One slice of a 10-cut large pizza is more food than one slice of an eight-cut small pizza.
And so the best course is the same as in the coffee-shop metaphor — drop the rate and watch revenues go up. If corporations and individuals hang on to more of their own money, it has a multiplicative effect throughout the economy.
Your tax savings might allow you to buy that new car you've been wanting (including the sales tax). The car dealership profits, as does the manufacturer of the car and the manufacturers of all the parts and materials that went into the car.
And all these firms pay more income tax.
As these companies do better, they hire more people. And these people, many of whom were formerly unemployed, now start paying income taxes again and start buying more things from more companies (and paying more sales taxes), which helps those companies to grow and so on.
Growth is the only way out of our fiscal crisis. Growth happens by lowering rates of taxation and keeping more money in the private economy. Individuals will do better, businesses will do better and more money will flow to the government to be used ideally for paying down our mountain of debt.
Contrast this with higher tax rates and less money in the private economy. Individuals keep less money, businesses keep less money, the economy shrinks and government revenues decline. It's a dismal picture indeed.
Growth through lower tax rates is clearly the only winning formula, even for liberals who want more money flowing to the government.
Grant Franjione is a group vice president at Oracle Corp. He lives in South Fayette.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Prospect Taillon to undergo season-ending hernia surgery
- MLB notebook: Yankees to donate $150K to charity for A-Rod’s 3,000th hit ball
- City police investigate death in Squirrel Hill
- Fun-seekers won’t let a Pittsburgh regatta without races get them down
- Russian winger Plotnikov could join Penguins in August
- Mountain Playhouse’s ‘Chapter Two’ provides funny, touching look at love and loss
- Burgeoning garden trend looks to nature as healing aid
- Local performers draw on travel experiences
- Rossi: Rutherford shines as old boss pouts
- Viburnum leaf beetles have made way to Pa., but you can limit damage
- Vincentian boys, girls basketball camps plant seeds for success