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November 26, 2007

Comments

Its true that supply side claims are often exagerated, but what people generally have to understand is that real supply side economics does not state lower tax rates = more revenue.

What it states is that there is a dimminishing marginal return to the rate of taxation - meaning that if a rate is cut in half, then revenue lost will be less then half. The converse it true as well, that a rate increase of 50% will yield less then 50% increase in revenue.

More revenue is only brought in via a tax rate cut when the rate is already so high that it is beyond the maximum revenue point on the laffer curve. This was the case with the top brackets before Kennedy's and Reagan's tax cuts.

Even though we are not at that point now, what still has to be understood in the cost benifit analysis is that even though rasing tax rates will bring in more revenue, it will be raised at the expense of the private sector. It is not a zero sum game. To raise a dollar of goververnment revenue, ot will cost the private sector more then a dollar. So the question now becomes, is the added revenue more or less valuable then the greater amount to be given up by the general economy?

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