Optimal Taxation Rates

The Republicans argue for lower taxes, the Democrats for more investment. So who is right? I don't know, but let's start with the correct mathematical basis.

The Republican claim is twofold: that lowering tax rates will increase investment, because there is insufficient incentive for investment, and that by increasing economic activity, lowering taxes will actually increase tax revenue.

Suppose the tax rate were 100%. Clearly, no one would have any incentive to work, because working would not bring any economic reward to the worker. Bringing the tax rate down to 99% would be huge. Suddenly, people would be getting some money for work, and their incentive to work would go up by essentially an infinite ratio. Less absurdly, consider a tax rate of 90%. Dropping from there to 80% effectively doubles the economic reward of income, while government revenue per transaction drops from 0.9 to 0.8, which is only 1/9th of revenues. It's a win-win.

But consider the opposite. At a tax rate of 20%, everyone already has a huge incentive to engage in economic activity. They are getting 80% of their money. The government on the other hand, by dropping the rate from 20% to 10%, is giving up 50% of the revenue from each transaction. It's quite obvious from the basic math that the optimal revenue level is not between 10% and 20%.

I would guess that the optimum is somewhere between 20 and 40 percent, in other words, where it was during the Clinton boom years.

No, dropping tax rates is not always advantageous. At current levels, it's quite harmful. We all need public education, roads, a military, and to finance our operation without debt.