Hi, this is DQ, and I have a question that I know Bookworm’s readers will have an answer to. I read a story today that said that next year’s federal deficit will hit a new record. Now, conservatives (with Bookworm leading the charge) always say that the answer to closing the deficit is to reduce taxes because this will stimulate the economy and produce more revenues over all even at the lower rate. This is true — up to the point when the loss in tax revenue due to the lower rate is so great that it is not cancelled out by the increase in revenues from the stronger economy. Liberals always say the answer is to raise taxes because this will produce more revenue. This is also true — up to the point where the negative effect the higher tax rates have on the economy is so great that it more than cancels out the increased revenues from the higher rates.
(As an aside, everyone knows the best way to close the deficit is to lower spending, but that’s not going to happen and, anyway, it is beside the point to my question.)
So, my question is, has anyone ever done any actual studies to determine what the ideal tax rate is? I mean “ideal” in the very limited sense of the rate that will result in the highest revenues to the government. If so, what were the results of the study?
Update: Rockdalian’s comment made me realize my question is a bit too simple. I was asking for a study that yielded a specific number — the percentage tax rate at which the maximum amount of tax revenue will be raised. But such a simple answer may not be possible. Does it matter what you tax? By that I mean do income taxes, sales taxes, inheritance taxes, etc. differ in their effect on the economy? Just to take those three, my theory would be that high income taxes discourage hard work and earnings, sales taxes discourage spending and encourage saving and that inheritance taxes have the least effect of the three but probably encourage spending. However, the question remains. Has anyone done any actual scientific studies to determine these effects?