An Economic Principle You Can’t Ignore

by Harvey Bluedorn

The Mercer County Board anticipates some financial pinch in the coming year.

Presuming that budget allocations are responsible and reasonable, the problem shifts to insufficient revenue.

I suggest that a tax rate increase is not the solution.

I quote briefly from an article I found on the internet.

“…[if] the government needed more revenue it would increase taxes … Government officials would get the false impression that raising taxes also raises the amount of money going into the … treasury. This false impression would take a long time to correct. Necessity, especially in politics, often occasions false hopes, false reasoning, and a system of measures correspondingly erroneous… … The most productive system of obtaining governmental revenue will always be the least burdensome.”

That quote is from Federalist Paper No. 35, published on January 5, 1788

Here in Illinois, the assessed value for the coming year on all property has increased, but a significant amount of farmland gets a sizable increase.

That actually sounds good for revenue, but not so good for property owners, and really not so good for a lot of farmers.

So we can actually expect a significant increase in revenue without any tax rate increase.

Apparently some on the county board are not satisfied that this property tax revenue windfall will be sufficient to counterbalance any decrease in other revenue and any increase in necessary expenditures.

But would a tax rate increase be the solution?

A tax rate increase is not the solution

People make decisions based on their own perceived best interests. We each have different perceptions, but this is what we do.

It you raise the tax rate, the people’s perception will be that it is less in their interest to increase or even maintain certain economic activities, and not in their interest to trust that the county is operating in their best interest. This will necessarily cause a decrease in revenue.

I suggest that the best course is to actually lower the tax rate – perhaps only a token amount at first – and all things being equal, this will have a positive economic effect, and it will actually cause an increase in revenue. Businesses will understand that it is safe to stay in Mercer, to move to Mercer, and to grow in Mercer.

As Alexander Hamilton wrote in the above quote, “The most productive system of obtaining governmental revenue will always be the least burdensome.”

1. Tax Cuts Increase Federal Revenues

“…Q: What policies would create a more robust economy?
A: Lower tax rates create better economic conditions. It’s simple: lower tax rates = more robust economy = more federal revenue….”

2. Growing out of control: property taxes put increasing burden on Illinois taxpayers

“…Property taxes are the single largest tax in Illinois, burdening residents far more than either income or sales taxes…….Property taxes are the main source of income for local governments in Illinois. …. Illinois should reduce the overall burden of property taxes to make them more affordable for average homeowners and to bring Illinois’ effective rates in line with those of other states….”

3. Lowering Taxes Would Actually Increase Tax Revenue by Daniel J. Mitchell

“For more than 30 years, I’ve been trying to educate my leftist friends about supply-side economics and the Laffer Curve. Why is it so hard for them to recognize, I endlessly wonder, that when you tax something, you get less of it? And why don’t they realize that when you tax something at high rates, the effect is even larger? And if the tax is high and the affected economic activity is sufficiently discouraged, why won’t they admit that this will have an impact on tax revenue? Don’t they understand the basic economics of supply and demand?…”

4. Will Higher Tax Rates Balance the Budget?

5. Sorry, New York Times, tax cuts sure do lead to economic growth by James Pethokoukis

“…cutting tax rates can be a pretty effective way to boost economic growth. And raising tax rates hurts economic growth….”

6. The Historical Lessons of Lower Tax Rates