Tax Rates vs. Tax Revenues

Some people take it for granted that if a state or federal government is lacking in tax revenues, then it can simply raise taxes on the rich to gather additional revenue. This assumes that those who have their taxes raised will simply go about doing what they were doing before without changing their behavior. Thomas Sowell calls this the “chess piece fallacy.” If taxes are too punitive, those who pay them may be incentivized to move elsewhere, leaving the government with less than what it started with. In one example, Sowell observes that the state of Maryland tried to raise tax revenues “by increasing the tax rate on people whose incomes were a million dollars a year or more. But, by the time the new tax rate took effect in 2008, the number of such people living in Maryland had declined from nearly 8,000 to fewer than 6,000. The tax revenues... actually fell instead by more than $200 million” (p. 51). Just because a tax-rate increases does not necessarily mean there will be an increase in tax revenues. Understanding these sorts of trade-offs may be relevant to the field of program evaluation. What good are government social programs if they lead to expanding budgets that chase away their tax base? If the goal of program evaluation is to improve social programs to serve the “common good,” then evaluators must acknowledge that even if an evaluation shows that social program participants are better off than a comparison group, that in no way confirms that they would be better off if no program had existed in the first place.

References

Thomas Sowell (2023). Social Justice Fallacies. Basic Books.