Increasing tax rates may not… increase taxes!

If governments face a budget deficit that is deemed to be too high, two actions can be taken: government spending is lowered, or government income is increased. The lion’s share of government income comes from taxes; increasing government income as a way of reducing budget deficits therefore translates to increasing taxes. But taxes are not increased, really; tax rates are increased.

But what few people know is that in certain situations raising tax rates will actually reduce government income from taxes.

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