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what if a 25% Tax would result in higher GDP growth over time (ceteris paribus, it would), thus resulting in a larger GDP and a larger total haul of tax revenues over ten years time? But then you could make the same argument for a 20% tax -- even greater GDP growth than with a 25% Tax, thus resulting in an even larger haul of tax revenues over ten years time?

I think you're falling into a fallacy here. A 5% decrease in tax rates will indeed create more economic activity, but not necessarily enough more to create more revenue.

At some point diminishing returns kicks in. I think that's what the LC is trying to show. There is an optimum tax rate. For revenue generation, not necessarily for economic activity. In fact, I think it is fair to assume the optimum rate for revenue is always higher than the optimum rate for economic growth.

In fact, I think it is fair to assume the optimum rate for revenue is always higher than the optimum rate for economic growth.

That is the long term vs short term question. A small change in the economic growth rate will create very large changes compounded over a long term. For example a 2% increase each year would be a doubling in about 35 years. A relatively short time for a nation.

On the micro scale, a business faced with a one time rate of 15% is very different than one faced with a constant 15% rate. The latter will over time find ways that will lower the base on which the rate is based and these changes will accumulate while the business grows.

I think you're falling into a fallacy here. A 5% decrease in tax rates will indeed create more economic activity, but not necessarily enough more to create more revenue. At some point diminishing returns kicks in. I think that's what the LC is trying to show. There is an optimum tax rate. For revenue generation, not necessarily for economic activity. In fact, I think it is fair to assume the optimum rate for revenue is always higher than the optimum rate for economic growth.

I'm not sure that you understand what I'm saying.

Tell you what: Howzabout I completely grant the proposition that a 30% Tax would bring in more Tax Revenue than a 20% Tax for Fiscal Year 2010. Okay, fine -- given just those two choices, for the purpose of maximizing Tax Revenues we could say that a 30% Tax Rate would be "more optimal" for 2010 than 20% Tax Rate. But if GDP growth would be substantially higher over, say, the next twenty-five years with a 20% Tax, resulting in a larger total haul in tax revenues, then wouldn't the optimum rate over 25 years be 20%? And the same argument could be made for even lower rates over even longer time frames.

To wit:

I just ran a spreadsheet over 25 years, based on a starting GDP of $100, a tax rate of 30%, and a growth rate of 3% annual -- versus a spreadsheet over 25 years, based on a starting GDP of $100, a tax rate of 20%, and a growth rate of 6% annual.

For the first 15 or so years, Tax Revenue was higher with the 30% Tax/3% Growth rate; but by the end of the 25 years, GDP was so much higher on the 20% Tax/6% Growth that more total Tax Revenue had been collected over the full 25 years.

(End values on the table with 30% Tax/3% growth were a final GDP of $209.38 on the and a cumulative total Tax Haul over 25 years of $934.50... versus a final GDP of $429.19 and a cumulative total Tax Haul of $984.55 on the table with 20% Tax/6% growth)

So, in that scenario, what's the "optimum" tax over 25 years? 20%, or 30%? And the numbers keep changing in favor of lower tax rates and higher total growth, the longer a time frame you consider. So what's "optimal" for tax-gathering depends to a great extent on what time-frame you want to consider.

Or, as I said before -- you could just throw out econometric pragmatism, go back to the Bible, and just say that God defines any Taxation over 10% as Tyranny.