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.

Continue reading

Advertisements

Why the Rest of the World Gains from U.S. Inequalities

Innovation is deemed crucial to sustained economic growth and welfare improvement. One may subsequently pose, as I do, that innovations require some sort of inequality before they can blossom. This does not mean that some people need to be kept poor so that others can innovate; it means that those individuals who have the potential to significantly improve things for society should be enabled (or left free) to act on that potential.

One of my favourite writers (and speakers), Milton Friedmanexplains that experimentation, which is closely related to innovation, can bring tomorrow’s laggards above today’s mean. I’ve drawn the picture below to illustrate what he means (or at least how I understood he meant it):

Bringing tomorrow's laggards above today's mean

Bringing tomorrow’s laggards above today’s mean

Thus, if we accept that today some inequities exist, which means that some are poorer than others, tomorrow the poorest (the “laggards”, on the left end of the graph) may be better off than the average today. The crucial insight is that inequalities are relative. Even though some may be better off relatively, everyone is better off absolutely.

Continue reading