The Costs of Taxation

Taxes are often a source of heated political debate. In 1776, the anger of the American colonies over British taxes sparked the American Revolution. More than two centuries later Ronald Reagan was elected president on a platform of large cuts in personal income taxes and during his eight years in the White House, the top tax rate on income fell from 70 percent to 28 percent. In 1992 Bill Clinton was elected in part because incumbent Georgr Bush had broken his 1988 campaign promise Read my lips no new taxes.

At least in this regard the younger George Bush did not follow in his father’s footsteps. As a candidate he promised a tax cut and as president he made sure to deliver. His critics however say he cut taxes too much depriving the government of revenue needed for vital public purposes. Certainly no one would deny that some level of taxation is necessary. As Cliver Wendell Holmes Jr. once said. Taxes are what we pay for civilized society.

Because taxation has such a major impact on the modem economy we return to the topic several times throughout this book as we expand the set of tools we have at our disposal. We began our study of taxes in. There we saw how a tax on a good affects its price and the quantity sold and how the forces of supply and demand divide the burden of a tax between buyers and sellers. In this we extend this analysis and look at how taxes affect welfare the economic well-being of participants in a market. In other words we see how high the price if civilized society can be.

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