Remember the Laffer curve

As President Obama continues to push the expansion of government, his plans to raise taxes may not be too far off. Obama has had his eyes of raising certain taxes from the moment he began his campaign and he will surely try to follow up on what he said. He believes that these tax increases will help reduce the deficit by paying for his massive programs. There is one problem though: in many cases they won’t.

It all comes down to the Laffer curve and the fact that increasing taxes does not always mean tax revenue increases. In fact, it can often decrease tax revenue by forcing some firms to leave the market, hence reducing the overall market production by whatever those firms produced and in turn, actually reducing tax revenue by the difference in the amount that firms which decide to stay in the market pay subtracted by the total tax amount that the firms who left paid with the previous, lower tax rate.

One of the taxes that Obama plans to increase is the capital gains tax. That tax though, is past the optimal tax revenue mark on the Laffer curve, or at best is sitting right at the peak with the 15% tax. This is evident because when Bill Clinton reduced the tax rate from 28% to 20% in 1997 the capital gains tax revenue actually increased. The same happened when George W. Bush further reduced it to 15%. On the other side, the tax was increased in the 1980s and the tax revenue from it actually decreased.

Obama has been questioned about this before and he still chooses to increase the tax for purposes of “fairness.” First of all, not only is he punishing the 100 million people in this nation who own stocks, but he is also decreasing government revenue. The logic behind it? He claims “fairness.” How he figures hurting about at third of Americans during a time like this and at the same time decreasing tax revenue and increasing spending is justified? I don’t know.

The worst part of this situation is that it is not only the capital gains tax that is in this situation. Many of our taxes are beyond the optimal tax revenue amount they should be at and increasing them will only hurt how much the government can take from taxes. In fact, many companies are already threatening to leave American markets if Obama imposes tax hikes on them. Among them is Microsoft, who’s CEO Steve Ballmer recently said that the company would move some employees offshore if Congress enacts the President’s proposal to increase taxes on foreign profits. Ballmer isn’t alone in the software industry, with nine other software executives also fighting back the hikes.

These tax increases will only hurt our economy and in many cases they will even decrease government tax revenue. Dan Mitchell of the Cato Institute recently said, “Even if all of Obama’s tax wishes comes true, the revenues won’t come close to satisfying his appetite for bigger government”- figure in the fact that many firms will even leave the market and production and sales will suffer as a result, and the argument that these tax hikes will make things worse is very reasonable.