American Republic Online

This snippet comes from the Sunday GOP debate. Giuliani exposes a flawed assumption made about taxation so well that I grabbed for it’s instructive value. He uses actual real world numbers from when he was the Mayor of NY to support his assertion. A rare thing these days when many politicians are throwing around obviously made up numbers like they are facts - for instance Mrs. Clinton saying “a lot of people did extremely well during the nineties… when economic policies lifts a hundred times more people out of poverty than in the Reagan years.” (emphasis added - 8/7/07 interview with Dylan Ratigan, CNBC.) - not that anyone calls them on it.

David Yepsen (Des Moines Register):”Mayor Giuliani, the Republican dogma against taxes now precluding the ability of you and your party to come up with the revenues that the country needs to fix its bridges?”

GIULIANI: David, there’s an assumption in your question that is not necessarily correct. It’s sort of the Democratic liberal assumption. I need money, I raise taxes.

YEPSEN: Then what are you going to cut sir, what do you cut?

GIULIANI: Wait, wait, wait. Let me explain it. The way to do it sometimes is to reduce taxes and raise more money. I ran a city with 759 bridges, probably the most used bridges in the nation, some of the most used in the world. I was able to acquire more money to fund capital programs. I reduced the number of poor bridges from 5% to 1.7%. I was able to raise more money to fix those bridges by lowering taxes. I lowered income taxes by 25%. I was collecting 40% more from the lower income tax than from the higher income tax. There is a liberal Democratic assumption that if you raise taxes, you raise money. We should put more money into infrastructure. We should have a good program for doing it, but the knee-jerk liberal Democratic reaction, raise taxes to get money, very often is a very big mistake. (ABC News clip - in the video player on the right side of page)

Now I know that many of you are confused by this fact. How is it possible to make more money by lowering taxes? The simplest parallel is the fact that McDonald’s makes a lot more money selling burgers for $1-2 than than Applebee’s does selling them for $6 (which we’ve previously discussed). The difference is volume. But how does that work with taxes?

Let’s look at a micro example: a toll (tax) road. Say there is a toll road between your home and your work. You’re not quite sure why this requires extra road taxation but it does save everyone in the neighborhood 15 minutes on their commute to work. So you pay the 10 cent toll, each way, every day. But then the toll goes to $1. Many of your neighbors start taking the longer back roads to work. A few brazen individuals have found a bike path access that allows them to use the road but avoid the toll booth. You continue to pay the toll. Citing bridge repair needs, the toll raises again to $10 each way. Now even more people avoid the toll through either legal or illegal means. Etc. etc. As tax rates rise people increasingly try to avoid them. This could be through complex tax shelters, or investing overseas. This could even be done through lying creative deductions on you tax return. This results in lower revenues collected.

One other impact that this example doesn’t address is the strength of the economy. One of the keys to a strong economy is the “velocity of money” - basically how many times does same $20 bill get spent? (once you pay for a product, that business pays the people that work for it who go out and spend their paycheck…) The more times money turns over the more money that businesses and the people that work for them make. Taxation tends to slow the velocity of money by removing those twenties from the heart of the economy for a while before returning them to the money stream. (I should note that the proposed Fair Tax addresses some of these issues, but I’m not going to delve into that again today)