10 Reasons Why Raising Tax Rates Decrease Total Revenue (and Vice Versa)

August 2, 2018May 3, 2021 Joe Messerli Daily Memes laffer curve, socialism, tax cuts, taxes, top 10

With an astronomical national debt that is added to daily, the media and liberal politicians always stress the need to “tax the rich”. Rarely ever is it suggested the government should cease spending a trillion more every year than they take in. Instead, they push “Medicare for all”, “free” education, and other prohibitively expensive new spending programs. Always, getting the rich to pay their “fair share” is said to cover the new spending. If you’ve ever studied Economics 101, you know that increasing tax rates doesn’t necessarily bring in more revenue. The Laffer Curve explains the general concept. It’s intuitive to think raising tax rates increases overall revenue; after all, the general equation is TOTAL TAX REVENUE = AVERAGE TAX RATE * TAXABLE INCOME. The problem is there are two factors–rate and taxable income. When you raise the rate, the second part of the equation does NOT remain steady. Let’s examine 10 reasons why raising rates often decreases total revenues:

People work less since their take-home pay decreases. Say you make $30 per hour. Would you work the same amount of hours if your pay decreased to $25? How about $20 per hour? Eventually, the rate goes low enough where you decide it’s not worth it. All workers have a different scale in their mind. When people work less, they have less taxable income, which means total overall revenue diminishes.
Businesses are less willing to invest since the projected return decreases. Businesses evaluate each potential investment by looking at cost versus expected return on investment (ROI). If the projected return drops, the chances of the investment being made decrease. That not only hurts the overall productivity of the economy, but you lose the cascading of spending. For example, a business decides not to build a new factory. Construction companies lose potential service revenue. Lumbar/building supply companies lose potential revenue from the construction company. Jobs that could be created along the way are lost.
Richer Americans and businesses often move overseas, taking all their tax revenue to another country. Nowadays it’s much easier for people or businesses to move to another country. The Caribbean is filled with low-tax havens. If you keep raising taxes enough that you drive the rich away, your effective tax collected equals 0 percent.
Investments are shifted from taxable bonds & stocks to tax-free investments like municipal bonds. Savvy investors regularly evaluate their potential rate of return of each investment and will adjust accordingly. For example, say they make $100 taxable income on a $1000 investment. With a tax rate of 50%, the after-tax return = 100/1000 * .5 = 5%. If the tax rate goes to 60%, the new after-tax return is 100/1000*(1-.6) = 4%. If a municipal bond pays a tax-free rate of 4.5%, the investor now has incentive to buy the bond, which means all the tax revenue is lost.
There’s less consumer spending since individuals have less disposable income. Whenever you raise taxes, you take disposable income from consumers. They have less to spend on computers, phones, cars, travel, etc., which means businesses lose all that revenue. The effect cascades since the businesses have less money to hire and invest.
There’s a “brain drain” on the productivity of the economy as highly-trained workers log fewer hours. There’s already a major shortage of highly skilled workers in the U.S.–doctors, engineers, programmers, etc.; as discussed, people are less willing to work additional hours if they make less money. This effects the overall productivity of the economy.
Businesses have less money to hire employees, award bonuses, and raise wages. Most companies know their success depends on their employees, so they award them when they have the money to do so. Successful businesses also want to expand, which means hiring more people. Less after-tax income decreases the ability to do both of these things.
Individuals are less willing to invest their savings since after-tax returns are smaller. Say you can earn 7% return from a relatively-safe stock investment, but only 4% from a no-risk bank CD. You may decide the greater return is worth the added risk. However, if tax rates are raised, your stock may only earn you 5%, so now the higher rate just isn’t worth the risk. This leads to less investment as a nation as well as less taxable income for individuals.
Individuals and businesses hire more lawyers and accountants to find more legal tax shelters (tax avoidance). As taxes go up, it’s natural for people to hire experts and spend more time trying to find legal tax shelters such as real estate, long-term no-dividend stocks, offshore tax havens, etc. This reduces overall taxable income, leading to less revenue than expected.
Individuals and businesses have more incentive to cheat on taxes (tax evasion). As the government takes more and more of your tax-home pay, there’s an increased incentive to use illegal means of avoiding taxes–not reporting tips & cash transactions, hiring people off the books, engaging in black market transactions of goods, and so on.

As you can see, simply raising tax rates doesn’t simply bring in more revenue. And the reverse is also true–Ronald Reagan nearly doubled tax revenues by dramatically cutting tax rates. JFK and George W. Bush also managed to increase tax revenue significantly by cutting rates. The U.S. tax system is too complex to simply say “tax the rich”. Humans will always adjust their behavior based on the punishment & reward incentives of the tax system.

Top 10 Best Badass Action Character Heroes

June 13, 2018June 13, 2021 Joe Messerli Top Lists action heroes, top 10

So much of modern TV and movies has become wussified. Real men characters are being replaced by overly-sensitive, politically-correct, social justice warriors. Diversity and whiny-liberal themes have overtaken modern entertainment. For example, consider what Disney has done to the once-great Star Wars franchise. The Last Jedi and Solo movies ripped out the testostone-pumping fun and focused all their attention on diversity of characters. Women dominate the leadership & fighting positions, while the men are all idiotic, reckless, and neutered. This top-10 list is a throwback to the good old days where movies concentrated on entertaining rather than preaching, back when men were really men.

10. Paul Kersey, Death Wish – Charles Bronson

9. Snake Plisskin, Escape from New York – Kurt Russell

8. Bryan Mills, Taken – Liam Neeson

7. Martin Riggs, Lethal Weapon – Mel Gibson

6. Colonel James Braddock, Missing in Action – Chuck Norris

5. T-101, Terminator – Arnold Schwarzenegger

4. John McClain, Die Hard – Bruce Willis

3. Bruce Wayne, Batman Begins – Christian Bale

2. John Rambo, First Blood – Sylvestor Stallone

1. Harry Callahan, Dirty Harry – Clinton Eastwood

Top 11 Reasons Government-Run Programs are Less Efficient than the Private Sector

May 7, 2018April 13, 2021 Joe Messerli Learning budget deficit, government spending, national debt, top 10

By: Joe Messerli

“Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other.” — Ronald Reagan

It’s no secret the U.S. government is an insanely chronic overspender. The U.S. national debt is already over $20 trillion as of 2018, with a projected growth of over $12 trillion in the next decade alone. What makes those numbers so depressing is just how little return we get from all that spending. Government consistently underperforms the private sector when it comes to results. Federal Express and UPS have exploding profits while the U.S. Postal Service experiences regular losses and may need a bailout. Health insurance companies like United Health, Aetna, and Cigna are thriving while Medicare and Medicaid are dominated by waste and fraud. The examples are endless. Most people know government is less efficient but can’t explain why. Let’s examine the reasons.

Government workers aren’t provided with the same salary, bonus, promotion, and stock option incentives. The pay for most government jobs is controlled by statutory, union, and budgetary rules. Thus, managers have limited, if any, ability to raise salaries for the best employees. And unlike private corporations, there’s no ability to award stock options or bonuses to bring out the best effort. Promotions are usually based on seniority. Add it all up and there’s almost no incentive for workers to go above a mediocre level of work effort in government. If the smartest and best employees can make several times more money in the private sector, why would they take a government job?
Poorly performing employees have far more job security. In the private sector, poorly performing employees lose their jobs quickly. In government, union and employee protection rules make it very difficult to get rid of a bad worker. So with no incentive for great work and limited ability to fire, government workers often settle into a minimum level of effort needed to maintain their jobs.
Government jobs are normally boring and don’t provide the self-actualizing careers available in the private sector. Government work is usually mundane, repetitive work on a 9 to 5 schedule. Think of the DMV, Medicare/Medicaid claim processing, permits & licensing processing, and so on. Boredom leads to a certain level of lethargy. Compare that to the private sector companies like Google and Apple where employees can change the world, have fun, and strive to reach their potential. It is far more likely to bring out the best in employees.
Government agencies max out their budgets whether they need to or not so future budgets aren’t cut. Since budget deficits are exploding out of control, politicians look for anything possible they can cut. If a department managed to perform all their duties one year on 25 percent less budget, they may decide to make the budget permanently 25 percent lower. Thus, departments raise their spending to max out their budgets to avoid any permanent cuts. The last month of each fiscal year is almost always the most costly as departments rush in last minute orders to use up the unallocated budgets whether they need to or not.
Government contracts are often rewarded as political payoffs to campaign supporters. Prices of contracts are often jacked up to reward campaign supporters. Or even worse, they’re rewarded for completely unnecessary projects.
Contractors raise their prices on essential services because they know the government has the money to spend. Economics are governed by the laws of supply and demand. For example, government will always allocate money for education, defense, health care, and utilities regardless of how much they cost. The providers of these services know it and hike their prices accordingly. It’s part of the reason we have the highest spending of any country in the world in health care and education despite low performance rankings in both. Why do you think school textbooks cost several times as much as entire courses in the private sector?
Inefficient programs often have their budgets increased to “fix” the problem. Only in government can you be rewarded with more money for poor performance. A perfect example is education. American students poorly perform in standardized tests compared to other countries. To “fix” the problem, politicians push for greater spending. Scores drop farther. Even more money needs to be spent to fix the problem, right?
Money is often spent for political reasons rather than any justifiable business expense. Regardless of how much spending is needed or the cost/benefit ratios, it’s political suicide to make budget cuts in certain areas (e.g. defense, medicare, education, etc.). Also, particulars of various programs are made for political reasons. For example, most people would agree that members of the military deserve pay/benefit increases. But should the same increases go to lifetime desk workers in the Pentagon as soldiers serving on the front lines in Afghanistan?
Politicians can pass laws requiring citizens to pay for certain items (e.g. health & car insurance) which disrupts supply and demand economics. It’s no surprise health insurance premiums soared when Obamacare passed, forcing Americans to own health insurance. Previously, if insurance rates got too high, Americans had the option to pay out of pocket or self-insure. No longer is that an option. Why do you think most health insurance companies actually came out in favor of the legislation?
The culture of government offices isn’t geared towards high-efficiency or excellence. Try visiting almost any government office and then immediately go to a private sector office. Observe the pace and efficiency of work. Observe how often in comparison employees stand around talking. Private companies cannot get away with consistently poor work habits since competitors would eventually run them out of business. The culture is very different in government with the guarantee of continued operation.
Politicians often micromanage and make decisions that should be left to experts and those more knowledgeable of the area. There are endless examples where politicians stuck their nose in areas they know little about. For example, allocating budgets for specific weapons programs in the defense department rather than letting generals choose how best it’s spent. Another example is choosing where road/bridge construction takes place rather than letting transportation efficiency experts decide. Politicians can also go into cover-your-ass mode when an expense gets out of hand. An example is the Bradley fighting vehicle that cost so many billions it was made into a movie called The Pentagon Wars.

Simply put, to get the most out of limited national resources, government should only be in charge of services that can’t or won’t be provided in the private sector (e.g. national defense, police & court system, etc.). Throughout history, you can almost plot a perfectly inverse relationship between level of central government control and national prosperity. It’s why socialist and communist nations inevitably struggle economically while free market ones thrive.

“The best minds are not in government. If any were, business would hire them away.” — Ronald Reagan