## Sunday, January 16, 2011

### An Optimal Income Tax Rate

I've always wondered if there is an ideal income tax rate. To setup the discussion, a few things I think both left and right can agree on:

• With a 0% income tax rate, the government will collect \$0 revenue because taxpayers keep every dollar
• With a 100% income tax rate, the government will collect \$0 revenue because people will not work when they can't keep the fruits of their own labor (or they'll hide their income from confiscation)
• Thus the Laffer curve, which is a curve between 0% and 100% showing that increasing the tax % increases tax \$ to a certain point; but eventually additional increases in tax % lead to lower tax \$
Is there a tax rate, somewhere between 0% and 100%, that optimizes revenue to the treasury? The Laffer Curve is always drawn as a symmetrical arc between 0% and 100% suggesting an optimal tax rate of 50%, but it's a back-of-the-napkin drawing and not to be interpreted literally. So what is the actual optimal tax rate?

I don't know for sure, but I'm happy to see Two Minute Conservative gave it a shot and came up with 18.3%. I'm not smart enough to run the math myself, but that feels about right. I've always thought the high-end of a fair income tax would fall around 25% (after that, people start to question why they have to give so much to the government), so 18.3% seems like it's in the ballpark.

Tax Revenue as a Percentage of GDP Doesn't Change
I wonder, however, if 18.3% is an optimal tax rate or simply the result of the data settling around a mean result. I read an article recently (still searching for a citation) that documented tax revenues for the last century and, regardless of the income tax % at the time, revenue to the government always came out around 20% of GDP. So even with a top tax rate of 70% in the 1970s, total tax revenue collected came to 20% of GDP. The conclusion of the article was that no matter the tax rates, taxpayers change their behavior and the government won't earn anything more through tax increases.

Crafting a Tax Policy
I see some things to consider in crafting a tax policy around an optimal income tax rate of 18.3%. First, should we setup:
• an 18.3% flat tax for all taxpayers
• a shallow progressive structure so that the poor pay 10%, the middle class pay 15%, and the wealthy pay 20%, for an overall average of 18.3%
• a steep progressive structure so that the poor pay 0%, the middle class pay 12%, and the wealthy pay 24%, again for an overall average of 18.3%
Second, since politicians love to try and manage the economy using tax rates, should we provide some wiggle room to help manage economic cycles of recession and growth? I would propose a set of rules that trigger increases and decreases in tax rates based on economic factors:
• In years of GDP growth >5%, increase income tax rates 0.5% (perhaps with a ceiling of 25%)
• In years of GDP growth <1%, decrease income tax rates 1.5% (perhaps with a floor of 15%)
This would allow for normal expansion and contraction in the economy, but in the midst of a recession, all taxpayers get a tax break to spur additional economic activity. As the economy grows, the government can benefit from higher tax rates.

Naturally, this contradicts the premise of an optimal tax rate. After all, if 18.3% yields the highest possible revenue to fund the government, we should never raise or lower it because tax revenue would fall. But perhaps there is a psychological benefit in cutting taxes in a recession, and a predictable income tax system would provide peace of mind and economic stability overall.

1. The 18.3% is a total and that means 9.15% for the Federal and a total of 9.15% for all state, municipal, etc. This would be about half what the Elected Ruling Class, ERC, is taking, literally at gunpoint, today.

The idea that they never get more than 20% is a speculation based on the "black economy," i.e. the barter and under-the-table cash dealing done that the various authorities would love to take a piece of. It is a measure of the degree of criminality the ERC has written into existence with their greed.

America has been better off than most of the world in the past, but we made a hard swerve to the left in 1913 and now, in the immortal words of Reverend Jeremiah Wright, "The chickens are coming home to roost!"

History predicts total collapse before we get another chance, but pray for an asteroid to take out DC some night in spite of the fact I have a brother there in government. He is a socialist and I never got along with him anyway. Let it be my sacrifice.

2. Excellent information and work from both of you! My only question is: how and when can this become common knowledge? I know there are significant political ramifications with truth such as this being exposed, but nevertheless, it must be done.

3. the tax rate will always be more when we ad in all the other taxes we pay. Energy tax,sales tax,property tax,cell phone taxes,school taxes,tolls,transportation tax.

4. After hearing that Adrian burned his data and notes one night, I've lost confidence in the 18.3% calculation. Nonetheless, I think the concept is on the money, and I have hope that an optimal tax rate exists.