Better Economy = More Revenues

Bill Hobbs reports that Tennessee is actually running a budget surplus this year, despite the fact that Tennessee doesn’t have an income tax and just a few years ago the state was in deep fiscal trouble.

Ironically it is a fiscally conservative Democrat, Phil Bredesen who is responsible for these gains. By growing the economy, Bredesen was able to get more tax revenue, which helped create Tennessee’s surplus without major tax increases.

There’s a lesson here – the best way to increase tax revenues is not to raise taxes, it’s to grow the economy. Tax increases reduce economic activity which decreases the amount of revenue collected. You may be taking more off the top, but you’re taking more off a smaller amount, which means that revenue is less. By keeping tax rates low, you encourage economic advancement, which means that you have more people moving into higher brackets, you have more people investing, and you’re taking a smaller amount off the top of a much larger pie. In other words, if you want more tax revenues, paradoxically enough, tax increases aren’t the best way to get it – and this is even more true in a recession.

(Link via Instapundit)

3 thoughts on “Better Economy = More Revenues

  1. Yet, there hasn’t been any noticeable growth in the economy. Seems like your theory has more holes than Swiss cheese.

  2. To quote an American author, H. L. Mencken: “For every complex problem there is an answer that is clear, simple, and wrong.”

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