1996 6.62 6.27 6.98 + .41 +.3 + .53 1.28 1.39 1.14 1997 7.03 6.57 7.51 + .41 +.3 + .53 1.36 1.47 1.22 1998 7.44 6.87 8.04 1.44 1.53 1.31 1999 7.85 7.17 8.57 1.52 1.60 1.40 2000 8.26 7.47 9.10 1.59 1.67 1.49 2001 8.67 7.77 9.63 1.67 1.70 1.58 2002 9.08 8.07 10.16 1.75 1.73 1.67 2003 9.49 8.37 10.69 (estimated 1.82 1.80 1.76 2004 10.00 8.67 11.22 projections) 1.89 1.87 1.85 2006 10.41 8.97 11.75 1.96 1.90 1.94 2007 10.82 9.27 12.28 2.03 1.93 2.03 2008 11.23 9.57 12.81 2.10 2.00 2.12 2008 c* 11.20 9.50 12.75 2.16 2.13 2.08 *(The rounding off estimations play some havoc with the interrelationship among PI, G, and TR, but it is not one which cannot be explained statistically and corrected*)
Given the foibles of the business cycle and unpredictable intervening variables which would prohibit the regular growth patterns of both PI and G at each of the tax rates, what is clear is that under the most conservative projections, the revenue government collected at each of the tax rates would 'even out' within a dozen or so years. Which of the tax rates would be 'best' is decidedly obvious. The increased tax rate apparently produces more tax dollars -- optimistically -- until about ten years down the road, but it does so at a very high cost in terms of economic growth. Under this scheme, the government would need all the revenue it could garner to pay the social safety net costs. Probably, government expenditures would be pressured to continue to rise at rates to keep it well above the level of revenue, with the added costs of deficits and debt service. Maintaining the tax rate would lead to the tendency toward regular slow economic growth, and thus do little to lessen fiscal pressures, costs of safety net, deficit, debt service, and the like. But by cutting the tax rate, there is a tendency for high rates of economic growth. The pressure for government costs and expenditures would be quite lessened by the expanding economy which would require more workers. The reduced costs of government would relieve the expense of social safety net in considerable degree, as well as that of deficit and debt service. Thus, the costs of government would be dramatically lowered, making it much less of a burden to bear the more slowly rising government revenue. In fact, it would be possible to lower the tax rate additionally somewhere along the line, thus stimulating the entire process another manifold. Furthermore, the reduced impedance from the lower tax rates would generate wealth creation that would make the projections at the 16.3 % tax rate utilized here much too low. There are many variables which could alter the pattern, of course. There is no hard rule that the relationships used among PI, C, and GDP would remain constant. In an expanding economy which would be created by the lower tax rate schedule, these would be all the more positive than the static figures used here for purposes of illustration. The 'dynamic' of the process indicates, therefore, that while the direction of the patterns would be sustained, the lowered tax rates would result in even more rapid economic growth and development than is assumed here. This dynamic also suggests that the projections given the higher tax rate are much too rosy. By the standard of increased revenue to government, the option of the proposed higher rate of taxation may seem attractive, but the opportunity cost incurred of a much lower growth rate could only be worth the trade if the objective was more government, more government power, or more government control. In any event, the result of additional revenue is too short lived to warrant it even on such clearly flawed basis. The variant of the Ohm's Law is, in itself, a useful instrument. Substituting any set of numbers as variables, the impact of the change would be demonstrated, expressing the interrelationships stated in the corollaries:
G 200 210 300 ------------------------ --------------------------- ------------------------- -------------------------- PI | TR 500 | .4 700 | .3 600 | .5
This posited axiom cannot demonstrate as constructed the impact of changes in Personal Income that occur in response to the changes in the tax rate. That relationship could be statistically determined, but it is beyond the current discussion to develop that. What can be clearly derived from the data and statistics employed here, however, is that there is an inverse relationship between changes in the tax rate and the increase (perhaps even reductions) in Personal Income, the interaction of which determines the level of G. Just as a change in G results in an opposite change in C (or on a more complex rendering, C and/ I and Xn), change in the average tax rate are in an inverse relationship to the growth of Personal Income, and thus to G. The possibility of further development of the relationship identity to express the impact of such changes over periods of time, as discussed, would be possible, and would make the tool even more valuable for economic policy analysis. The proportion of C as a part of GDP rose for 1995 because of the slower rise in GDP which caused a slower increase in C, but the rise in C was not as slow as the rise in GDP due to the nature of the nondiscretionary character of much of C. But with the increasing rise of GDP on the lower tax rate, C as a percentage of GDP would once again fall to at least its previous level. In the total picture, this would result in increased savings and investment, which in turn would help generate even greater increases in the rise of GDP. This would create a condition of falling rate of average tax. This would be even more the case if the tax was reduced more for upper income levels -- fueling even more rapid rises in GDP, and with it a continued fall in C as a percent of GDP even as the level of C also actually climbed. But the function of this in regard to government revenue would be to increase it by more than had been expected, so the revenue at the 16.3 tax rate would go up more rapidly than the projections indicate. The apparent initial temporary 'gap' in revenue would close much more quickly. One expression of the inverse relationship between tax rates and Personal Income would be to calculate the ratio of % ^ in Marginal Personal Income to the % ^ in Marginal Tax Rate. This would allow a comparison of the impact of such policy options:
^ MPI % ^ MG
The reduction of the tax rate from 19.3% to 16.3% would produce a negative coefficient:
B. 6.98 - 6.21 = .77/6.21 = .124 = -.252 1.14 - 1.199 = -.59/1.199 = -.492
With the increase in the tax rate to 22.3%, the result would be a smaller and positive number:
A. 6.27 - 6.21 = .06/.621 = .0097 = .0609 1.39 - 1.199 = .191/1.199 = .1593
The coefficients thus arrived at indicate a large impact on PI as a result of the change in tax revenue at the altered tax rate. It is negative, at least initially, for the tax decrease, and positive for the tax increase, but much smaller, identifying the tax cut as the preferable strategy if the objective is to increase the living standard of the population. A similar ratio can be calculated for Personal Income to Tax Rate:
^ MPI %^MTR A 6.91 - 6.21 = .7/6.21 = .1127 = .8379 22.3 - 19.3 = 3/22.3 = .1345 B 6.27 - 6.21 = .06/6.21 = .0097 = -.0006 .163 - .193 = - 3/.193 = - 15.544
These statistics point up the validity of the corollaries as to the relationships among tax rate changes, government revenue, and changes in personal income, providing empirical validation of what the Ohm's Law variation is unable to provide. to the top Continue
