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May 16, 2006
Lower Taxes = Higher Tax Revenues
hy is it so hard for most people to understand this simple equation?
Think about it in terms of selling a product. Sure, you can make more money per unit if you raise the price of your widget from $1.50 to $2.00. But at a certain price, your total profit goes down because people stop buying. In those cases, dropping the price actually RAISES revenue.
If you spend $.50 making your widget, and sell 100 of them at $2.00 each, your total revenue is $200 and your profit is $150.
But if you drop the price to $1.50 and sell 1000 widgets as a result, your revenue is $1,500.00 and your profit is $1000.00.
(Go ahead...check my math...if I get a number wrong, the idea is still correct.)
Now think of this in terms of taxes. When you raise taxes too high, the number of people paying taxes will drop because they will leave your state. This includes businesses. Here in California, we've been losing people and businesses to other states because of high taxes. Our tax revenues go down when taxes are high, and they go up when taxes are cut.
The WSJ has an article today "Live Free or Move" talking about this fact, and how so many states--California, Connecticut, Illinois, Massachusetts, New York, Ohio, Pennsylvania, and Wisconsin among them--get it wrong thinking that they will raise tax revenues by raising taxes. Instead, they damage their economy, which means less business, fewer transactions, and consequently lower tax revenues.
Now new data is out and it shows that the states that embraced supply-side tax cuts are not only financially more sound and enjoy stronger economies, but they are draining residents away from the states that opted for high taxes. The Pacific Research Institute has crunched the tax numbers in all 50 states and published the "U.S. Economic Freedom Index" ranking all states according to how friendly or unfriendly their policies were toward free enterprise and consumer choice in 2004--the most recent year that comparative data is available for each state. It's clear that the economic policies of 2004 determined where each state fell in the rankings, and shaped 2005 economic performance.
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Posted by witnit at May 16, 2006 12:22 PM
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