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Raising taxes vs. raising tax rates

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There is an argument that raising tax rates does not necessarily increase tax revenues, because increased tax rates discourage the taxable activity and thus shrink the tax base. This is often interpreted as an argument against raising taxes. It's not.

This week's action in Congress provided an example. The senate first failed to pass, then passed, an amendment that ended $6 Billion a year in tax credits to ethanol producers. That increases taxes, since it eliminates a tax credit. However, it doesn't increase tax rates. While the amendment is attached to a bill that's unlikely to come to a vote, the 73-27 voting margin suggests that the senate could support similar cuts in the house agriculture bill.

Incidentally, ethanol as produced in the U.S. is a boondoggle no longer supported by environmental groups, as about 75% of the energy in corn based ethanol is from fossil fuel inputs; only about 25% is from the sun, so it's not really a renewable fuel. Meanwhile, we have tariffs to prevent import of Brazilian ethanol from sugar cane, which uses much less fossil fuel - tariffs that the senate also voted to end.

Action on ethanol subsidies:
http://www.csmonitor.com/USA/Politics/2011/0616/Senate-votes-to-end-ethanol-tax-breaks-What-it-means
http://content.usatoday.com/communities/greenhouse/post/2011/06/senate-cuts-ethanol-subsidies/1
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[User Picture]
On June 17th, 2011 04:17 pm (UTC), izmirian commented:
Yes, the vote is great news.
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