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John Cogan on the Negative Effects of High Taxes

“One thing about these high marginal tax rates in the 50s, is very few people payed them, and there’s a political economy reason for that. When you raise tax rates very highly, you create incentives for lobbyists, greater incentives for lobbyists to create loopholes to avoid those taxes. Daniel Patrick Moynihan once described the tax system as like a hydraulics system. When the rates go up, the loopholes go up, and the ability to avoid goes up.

“And so, what we found over time was that when you lower taxes and broaden the base you get a much more efficient system. When you try to raise taxes to raise revenues you automatically create more rent seeking, more loopholes, and a less fair tax system.”

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