how tax and gdp work

WSJ tax lessons


I found this little law of economics amusing. It also explains neatly why tax revenues go up when tax rates go down (within reason). GDP is the primary engine of tax revenue, not the actual rate of taxation. But the rate of taxation directly effects the levels of investment, the expansion/flight of businesses, and so forth. Obviously taxes are considered either a cost, in which case they're passed on and slow down transactions (or drive them underground), or a punishment.. in which case they're avoided by moving, not doing business, or not doing taxes. The government tends to frown on the last option, and from the accounts of political pandering, it doesn't much like the first option either. I have often found it difficult to explain to people that raising tax rates (even on a pitiful few) generally means less economic activity for the rest of us.

If for no other reason, this might be an explanation for the reason I see for some limitations on the function of government in order to limit the cost (and thus limit the rate of the tax so as not to generally impede business cycles).