The Purpose of a Tax

Taxes* serve two purposes: the first is to provide governments with revenue, and the second is to deter or regulate activity i.e. sin tax on alcohol or trade tariffs.

Notice, neither purpose’s main role is to serve as a catalyst toward economic growth like Republicans believe. Republicans are confident, just so sure, that if we lower taxes the economy will prosper. But understanding the purpose of taxes, and just basic tax history, there is little evidence to support the Republican model. Tax rates have been consistently decreasing for decades, yet the economy has still had its ups and downs. The point is economic growth is not solely determined by tax rates – it’s not that simple.

I think Democrats better understand the purpose of taxes. Democrats do not argue higher taxes lead to economic growth (because it is true at a certain point when taxes go too high they will deter economic activity). When liberals reference the higher Clinton era tax rates, they are referring to the strong economic growth that went on during that time. The significance being high tax rates did not deter economic activity. They did, however, serve the role of raising revenue, which led to 4 years of a balanced budget.

So Republicans are framing the debate around taxes incorrectly. It’s not; we need to lower taxes because that will lead to economic growth. Instead it’s at what rate should taxes be set in order to maximize revenue, but at the same time not deter economic growth.  So the tax rate should not be viewed as an economic starter, but only an economic deterrent.

Given our current tax code, it’s hard to argue that it is high rates that are hindering economic growth. Taxes were slightly higher in the 90’s and drastically higher in pervious decades, and in both cases economic growth was much greater. If taxes now are lower than during an era of greater economic prosperity then there is no reason to believe lowering them more will solve the problem. So the basis of the Republican argument, taxes are too high, is really an unfounded claim.

Now, this is not an argument that government should try to squeeze every penny out of taxpayers it can without hurting the economy. But given the country’s increasing deficits, under funded schools, crumbling infrastructure, growing numbers of people living in poverty, a disappearing middle-class, and a slew of other problems, more revenue is not inherently bad.

The larger point in all this is Republicans’ answer to every problem is to cut taxes. That’s obviously not the solution. Tax rates are historically low, and there’s no evidence that further reducing them would spur on economic growth. Instead we should set tax rates so they can serve their purpose of raising revenue without being a drag on the economy.

We need to look at other ideas to promote economic growth outside of just ‘cut taxes!’ This could be rebuilding our infrastructure, investing in new infrastructure like high-speed rails, investing in new alternative forms of energy, or creating policies that promote hiring here in America rather than overseas. Here is where the Democrats have an edge, the stimulus package that was passed, and The American Jobs Act (that was not passed) were filled with ideas to boost economic activity. They were ideas that went beyond cutting taxes for the rich in the hopes the wealth will trickle down. Although some may disagree, most economists concur that the stimulus did work, and the American Jobs Act would have reduced unemployment.  Economic growth will not come from padding the pockets of the wealthy, but from investments aimed at putting people back to work.

*To make things simple, taxes in this post refers to individual tax rates


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