How Are Tax-Rate Adjustments and Government Revenues Related? | The Business Desk with Paul Solman | PBS NewsHour

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In the fall of 2007, when the U.S. economy first seemed in peril, I began answering reader queries here on the Business Desk. I still do so, but this page has expanded to include posts from eminent economists, "far-flung correspondents," and a variety of voices that have intriguing and/or useful things to say about economics, broadly defined. Please feel encouraged to respond to any and all of them.

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How Are Tax-Rate Adjustments and Government Revenues Related?

Money and Taxes Image by Jon Boyes/Getty Images.

Paul Solman answers questions from NewsHour viewers and web users on business and economic news here on his Making Sen$e page. Here's Wednesday's query:

Elke from Roswell, N.M. asks: If tax rate adjustments did not affect revenue very much, did that have to do with simultaneous adjustments in deductions and exemptions?

Paul Solman: After doing the usual "little green man" double take when reading that this email came from Roswell, New Mexico, I sent it on to Columbia Law School professor Alex Raskolnikov, the tax expert around whom our story on the history of top tax rates was built. He writes:

"I'm not sure what's behind the "if" clause (our segment was focused on the connection between rates and growth, not rates and revenues, just to make sure), but it is true that rate changes do not necessarily lead to revenue changes. Adjustments in deductions and exemptions are one reason. Loophole elimination is another (that one was important in 1986). Taxpayer responses is yet another one (e.g., people working less or saving less if rates go up) -- that's the most important reason in theory but, I would say risking over-generalizing, the least important of the three reasons just given in practice. Oh, and we shouldn't forget about the economy overall. If rates go up and the economy happens to go into a depression around the same time, tax revenues will drop. If rates go up and the economy happens to boom around the same time (the Clinton economic expansion), the revenues will increase. Of course, if rates remain unchanged and the economy slows down (speeds up), the revenues will decline (increase) as well."

This entry is cross-posted on the Rundown- NewsHour's blog of news and insight. Follow Paul on Twitter.

-- Posted January 11, 2012 | Comments ( ) | Permalink

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*Image by Jon Boyes/Getty Images.* *Paul Solman answers questions from NewsHour viewers and web users on business and economic news here on his [**Making Sen$e**](http://www.pbs.org/newshour/economy/makingsense/) page. Here's Wednesday's query:* **Elke from Roswell, N.M. asks**: If tax rate adjustments did not affect revenue very much, did that have to do with simultaneous adjustments in deductions and exemptions? **Paul Solman:** After doing the usual "little green man" double take when reading that this email came from Roswell, New Mexico, I sent it on to Columbia Law School professor [**Alex Raskolnikov**](http://www.pbs.org/newshour/rundown/2011/12/when-did-the-great-depression-start---and-why-it-matters.html), the tax expert around whom [**our story on the history of top tax rates**](http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_12-12.html) was built. He writes: > "I'm not sure what's behind the "if" clause (our segment was focused on the connection between rates and growth, not rates and revenues, just to make sure), but it is true that rate changes do not necessarily lead to revenue changes. Adjustments in deductions and exemptions are one reason. Loophole elimination is another (that one was important in 1986). Taxpayer responses is yet another one (e.g., people working less or saving less if rates go up) -- that's the most important reason in theory but, I would say risking over-generalizing, the least important of the three reasons just given in practice. Oh, and we shouldn't forget about the economy overall. If rates go up and the economy happens to go into a depression around the same time, tax revenues will drop. If rates go up and the economy happens to boom around the same time (the Clinton economic expansion), the revenues will increase. Of course, if rates remain unchanged and the economy slows down (speeds up), the revenues will decline (increase) as well." *This entry is cross-posted on the [**Rundown**](http://www.pbs.org/newshour/rundown/)- NewsHour's blog of news and insight. [**Follow Paul on Twitter.**](http://twitter.com/paulsolman)*