Is there a limit to revenue raising?

The American government has traditionally relied on taxing its citizens as a major source of revenue raising. According to the Heritage Foundation’s statistics for 2012, tax revenues comprised close to 27 percent of the gross domestic product. Interestingly, this percentage has remained relatively constant through successive governments, Democratic and Republican.

Whether their platform includes a promise to lower government spending and reduce taxes or a commitment to developing more social programs, both major parties prove the veracity of the maxim that only two things in this world are certain – death and taxes.

The Laffer curve
This being the case, is the sky the limit when it comes to revenue raising? Is the tax paying public a cash cow to be milked for all that it is worth? The answer is no, according to the Laffer curve, an age-old economic model popularized by US economist Arthur Laffer in the 1970s.In demonstrating the relation between rates of taxation and government income, the Laffer curve shows that taxable income is elastic, and changes as the rate of taxation is increased or decreased.

The curve can be used to calculate both the maximal revenue producing tax rate (that is, the one which will afford the most revenue to the government coffers) and the optimal tax rate (which will raise a desired amount of revenue while not unduly distorting the economy).

The maximum vs. optimal tax rate
If the Laffer curve were precisely symmetrical, the maximal tax rate would fall exactly in the middle, at 50 percent. However, research by economists has shown that the tax rate which will produce the most revenue tends actually to fall somewhere to the right of center, or about 70 percent. The optimal tax rate is quite a different matter, however.

As the rate of taxation which is best designed to bring in a specific amount of revenue without significantly changing the current economic system (for example, by discouraging the exchange of money in favor of barter), it is much more flexible.

Alternatives to revenue raising
There are alternatives to revenue raising in order to generate funds for the National Treasury that have perhaps not been adequately investigated to date. The most viable of these would be innovative government initiatives aimed at the stimulation of economic growth. Another possibility might be the sale of some of the billions of dollars’ worth of publicly owned assets, including business enterprises and property.

Either of these would enrich the Treasury without placing an undue burden on the average wage earner / tax payer.