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How Are Tax-Rate Adjustments and Government Revenues Related?

Money and Taxes
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*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.
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