An Economist’s View: Biden, media failing us on soaring lumber prices
This op ed appeared in the Duluth News Tribune on June 21, 2021 In March, the median price of a home sale in Duluth hit $217,000, up 14% from last…
Yesterday, I wrote about how higher tax rates don’t necessarily mean higher tax revenues. In both Minnesota and the United States generally, the historical record shows that the share of income taken in by the state or federal government is independent of the rates of taxation it imposes.
Last year, I wrote about how corporate tax revenues went up in Britain after the government cut corporate tax rates. Another example of the non-relationship between tax rates and tax revenues comes from Canada. In August last year, the Globe and Mail reported that
The Liberal government’s tax on Canada’s top 1 per cent failed to produce the promised billions in new revenue in its first year, as high-income earners actually paid $4.6-billion less in federal taxes.
The Liberal Party’s campaign platform said a new top tax bracket would raise nearly $3-billion a year, but an analysis of recently released data from the Canada Revenue Agency (CRA) shows the expected benefit didn’t materialize.
The latest available tax records show that revenue from Canadians earning about $140,000 or more – which had previously been the fourth and highest tax bracket – dropped by $4.6-billion in 2016, the first full year that the Liberal tax changes were in effect. Further, 30,340 fewer Canadians reported incomes in that range for 2016 compared with the year before.
The Canadian government had a ready explanation
Finance Minister Bill Morneau’s office told The Globe and Mail that the drop in revenue from high-income earners appears to have been a one-time event. Because the changes were announced in late 2015, before the year was done, taxpayers had the opportunity to shift income into the 2015 tax year, sheltering those funds from the higher 2016 taxes. As a result, the government says tax revenue was higher in 2015 and lower in 2016. A spokesperson for Mr. Morneau said early indications are that 2017 will show “a substantial rebound” in revenue from high-income earners.
Maybe, maybe not. What Finance Minister Morneau’s office is arguing is that people saw the tax hike coming and reacted – taxes are incentives, after all – and that this lowered revenues. Apparently, they will stop reacting and revenues will shoot back up to where they were expected to be. That seems an odd assumption.
Nevertheless, many people still struggle to accept that tax revenues won’t rise just because politicians have raised tax rates. As long ago as 1978, the economist Milton Friedman was having to explain why this might be so in his Newsweek column.
Some tax cuts can benefit both the Treasury and the taxpayer because of an important but neglected distinction between the cost of a tax to the taxpayer and the revenue it yields to the government. The capital-gains tax is a current widely discussed example. You may have an asset that you would like to sell but that you continue to hold because of the high capital-gains tax that selling it would generate under current law. You would be willing to pay something in order to sell it, but not as much as the current law demands. The government has, as it were, priced itself out of the market. A lower price, at which you found it desirable to sell, would leave you better off and produce revenue for the government. The revenue gain from such additional sales might more than compensate for the loss from sales made despite present taxes.
The top-bracket rates of the personal income tax are another example. Many taxpayers engage in activities that would otherwise be unprofitable in order to save tax. They buy tax shelters, say, that cost them, as they figure it, 25 or 50 cents on the dollar in order to save Federal taxes of 50 to 70 cents and perhaps state taxes as well. At lower rates, they might well prefer to pay the tax and invest their funds in the most profitable ventures. They would be better off, and the government would get more revenue. Every time any one of us does one thing rather than another because the first produces a tax deduction while the second does not, we are illustrating the general principle.
John Phelan is an economist at the Center of the American Experiment.