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Why liberals and conservatives see tax rate cuts differently

Liberals and conservatives see taxes from completely different points of view. To a liberal, taxes are the government's source of revenue. To a conservative, taxes are a necessary evil required to fund the government activities that we cannot do without.

Conservatives believe that government should protect its citizens from external enemies, and should otherwise stay out of the way of the activities of free people. Liberals believe that government should be the answer to social problems of all sorts.

A government that is the answer to social ills must by its very nature be a large government. A large government is an expensive government, and so it requires more tax money than a government that is limited in scope.

Without going into the whole idea of redistribution of wealth that is common to these arguments, I think there's another reason why liberals want to keep tax rates high and conservatives want to keep them low. Given a certain steady volume of economic activity, a higher tax rate will ensure government receives a larger share of the result of that activity than a lower rate.

Conservatives believe that with a limited government a lower rate should be sufficient. If government is limited, then it isn't as expensive and a lower rate makes sense, giving more freedom to the people being taxed.

Conservatives also believe that if you punish a behavior, such as economic activity, by imposing a high tax rate on it, that you will get less of that behavior. This is where the conservative notion that if you raise taxes you get smaller revenues comes from. If you raise taxes by ten percent, and get ten percent less economic activity, you end up with smaller revenues.

Suppose you have $1,000.00 worth of economic activity taxed at 10%. The government takes in $100.00. Now raise the tax by 10%. If the economic activity stays the same, the government will take in $110.00. But if the economic activity goes down by 10% then the government won't be taking in $110.00, but will instead by taking in $99.00.

The government isn't making quite as much as before the rate increase, but it isn't losing much relative to what it took in before it either. Meanwhile the economy is in a slump, people have less freedom, and the standard of living goes down.

On the other hand, if you remove the disincentive to economic activity that is represented by a high tax rate, you will get more economic activity. Suppose instead of raising the rate by 10% it was lowered by 10%. A liberal would look at this and see for that $1,000.00 worth of economic activity the government would only be getting $90.00. But if the economic activity goes up by 10% due to the rate decrease, the government will still take in $99.00.

For the conservative this is a good outcome. The tax burden has been decreased, personal liberties are up as a result, and economic activity is up. The people prosper, and government still takes in nearly as much as it did before the tax rate decrease.

Even for the liberal this isn't that bad an outcome. Government is still raking in the money. What irks them though is that they only see a relative loss for the government. They don't see an inverse relationship between the tax rate and economic activity.

Instead they see the increased economic activity and lament the loss of the $11.00 that the government would have taken in if the tax rate had stayed the same while the economic boom took place.

This is the big difference as I see it between liberals and conservatives when it comes to taxes. Conservatives understand that to continue functioning a government needs some revenues, but they also see taxes as a burden on liberties and on the economy. They see economic activity inversely related to the size of that burden.

Liberals on the other hand see rate cuts as cuts in what the government receives, regardless of economic activity levels. They see them as limits on the effectiveness of their social programs. Personal liberties and economic freedom only get in the way of those programs.

This is why conservatives favor lower tax rates while liberals favor increasing taxes.

I know that my analysis is probably an over-simplification of the true state of affairs. I know that the actual relationship between economic activity and tax rates is probably not the same as I've described it in my examples.

Even so, I think the basic principles make sense. I prefer liberty and economic freedom to socialist government.

I also like keeping more of what I earn. How about you?

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