Reply #60: What profits [View All]

[Hammie]

Our government does not have profits. Profits are the result of some sort of business activity.

The government has revenues (taxes) and expenditures (services that it provides). If you premise is that the government should provide the maximum possible amount of service possible, and there would be few on this board that would disput that, then the goverment has a strong motivation to maximize its revenue. Who will be the beneficiary of the services is not important, only the desire to provide a maximum amount of services.

Now, each person has an optimal tax rate. If you tax any individual at 100%, they will do nothing and you revenue will be zero. If you tax an individual at 0%, they will do plenty, but you will still get zero. Logically then, there is some tax rate between 0 and 100% that will maximize the revenue realized from each individual. The optimal tax rate will vary from individual to individual. There will also be an average tax rate for everyone, that maximizes the total revenue to the government.

If the tax rate is non-optimal, the government will receive less revenue. The tax rate can be non-optimal by being too low, or by being too high. Further more, if you believe that taxes retard economic growth, the optimum tax rate shifts to a lower value if you take into account the present value of future tax revenues.

The obvious problem is how does one determine the optimum tax rate? I couldn't even begin to guess, but denying that one exists isn't it.

If you understand that there is a real optimum tax rate, it will also likely dawn on you that there is a real fundamental limit to govt revenues and thus a fundamental limit to how much service government can provide.