04/08/2011 02:44 pm ET Updated Jun 07, 2011

Bloodletting Taxes -- Myths and Facts

In the good old days, bloodletting would be prescribed to help you heal of your ills. If the bloodletting didn't help, you might get bled some more. Of course, the patient who just got bled might feel weak and so what better to help that patient then... a little more bloodletting. Many patients survived the treatment while many were killed by it. While this all may sound barbaric to us now, for thousands of years, bloodletting was one of the most popular medical treatments in many cultures including the ancient Egyptians, Greeks, Mayans and Aztecs.

Are taxes bloodletting society? Do they kill off innovation and growth? Is our tax rate killing America's future?

In math, you often start discussions by looking at the limits and then seeing what happens in between, so let's try this method with tax rates. If you have a 100% tax rate, then everything you earn goes to taxes which are then distributed by elected officials, in theory, for the public good. You would have no incentive to work or earn outside of the concept of collective good or under threat. Unless human nature changes radically, this economic model is doomed to fail. What about the other extreme? If you have a 0% tax rate, then the government doesn't collect any money and can't do basic things like defend the country, enforce laws, put out fires, teach children, build roads, protect the environment. Both extremes are obviously not possible, but somewhere in between is a rate that encourages people to work, to develop new companies, to innovate while at the same time providing enough money for the government to serve its necessary functions.

What is that magical tax rate that encourages innovation but provides enough money to run the government? There isn't one. Some of the wealthiest, most innovative countries in the world such as Belgium, Finland, Germany and Denmark have some of the highest marginal tax rates. These higher tax rates support greater social services, many of which Americans pay a far higher rate out of pocket. There is no reason to believe that moving America's marginal tax rate down from 35% to 30% or even 25% will stimulate growth. No one has ever found a would-be entrepreneur that said, "I would have built that business and made $5 million last year, but what held me back was that the marginal tax rate was in the 30's so I decided to stick with my regular job that pays me $60K a year." The idea that dropping the marginal tax rate from 35% to an even lower rate will result in an explosion in business growth and resulting tax revenue growth is pure fantasy. Hence, no data is ever offered in support of this theory. Trickle down economics has never resulted in working class people benefiting, but it certainly benefits those in the top few percent of earnings. This is why we have witnessed a faster rise in American wealth inequality than in other wealthy countries.

I certainly don't advocate taxes simply for the sake of taxing, but we need to fund our government in order for it to provide basic services. A simple fact is that the United States has one of the lowest tax rate as a percent of GDP of any wealthy country in the world. America's current tax rate is NOT bloodletting our innovation - companies like Yahoo, Google, Facebook, Groupon, Microsoft set up shop in America and many more will follow as long as we invest in our future rather than make important political decisions based on fiction and medieval logic.

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