Here's Another Example – Raise Taxes, Cut Revenues

The Wall Street Journal has an editorial this week about taxes in Oregon.  It’s another example that proves the well known relationship between high marginal tax rates and government revenues.  Let’s look at this new example and what it means for economic growth now …

In The Wall Street Journal editorial, we read that in 2009 the State of Oregon raised tax rates on the rich.  Specifically, the tax rate was raised to 10.8% for joint filers with incomes between $250,000 and $500,000, while the tax rate was increased to 11% for joint filers making over $500,000.  (Note that these taxpayers also have to pay Federal income taxes in addition to Oregon income taxes.)

Why did the State raise the taxes on the top 2% of income earners in Oregon?  Simply, they needed more revenues.

However, taxpayers are smart.  They genuinely don’t like to have their taxes raised.  They prefer to keep the money they worked hard to earn.  So, how did Oregon do revenue-wise after the tax increase?  You guessed it.  Tax revenues fell from $180 million in the previous year to $130 million.  Oregon also anticipated 38,000 taxpayers would pay the higher marginal tax rates, but they were wrong.  Only 28,000 taxpayers paid the higher rates.

Why did Oregon lose taxpayers and revenues?  The answer is simple.  High income tax rates act as a disincentive to work.  Some people might move to other States where taxes are lower.  In other cases, one spouse might stay home and stop working.  Sometimes, people will work fewer hours.  Sometimes, they might prefer to retire a few years sooner, rather than give up so much of their income to taxes.

The economic evidence is compelling in example after example, and study after study.  High marginal income tax rates discourage people from working and producing, resulting in lower economic growth and lower revenues to government.

If government wants greater economic activity, greater economic growth, and higher revenues, it’s time to start adopting pro-growth economic tax policies.

Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.

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