By Dr. Merrill Matthews - PolicyBytes
IPI Resident Scholar
Its astounding how many politicians pundits and the media have been making a fundamental economic error as they debate how to address the problem of federal debt.
And no one seems more confused than President Obama.
Many seem to operate under the assumption that higher tax rates equal more federal revenue and lower tax rates (e.g. the Bush tax cuts) equal less federal revenue.
Hence the presidents repeated callsespecially as his reelection campaign is kicking into high gearfor higher tax rates on the rich" and his assertion that he will not renew the Bush tax cuts for families making more than $250000. He seems to think those changes will dramatically increase federal revenue.
The fact is higher tax rates could increase total revenue or they could decrease it. Conversely lower tax rates could decrease total revenue or they could increase it. It all depends on the specific tax and the size of the increase or decrease. And whether there are viable options (e.g. tax shelters) to avoid the higher tax rates.
The presidents deficit commission seemed to understand this principle. And until the president does we will make very little progress solving the federal debt problem.
