• Publications
    • Essay
    • Case Study
    • Policy Study
    • Report
    • Testimony
    • Other
    • Newsletter
  • Blog
    • Daily Blog
    • Podcasts and Radio
    • Video
    • Infographics
    • Commentary / Op-Eds
    • Events
  • Events
  • Donate
  • About
    • Our Team
    • Show-Me Institute Board of Directors
    • Fellows and Scholars
    • Our Authors
    • Jobs
  • Contact
  • Explore Topics
    • Education
      • Accountability
      • Education Finance
      • Performance
      • School Choice
    • Health Care
      • Free-Market Reform
      • Medicaid
    • Corporate Welfare
      • Special Taxing Districts
      • Subsidies
      • Tax Credits
    • Labor
      • Government Unions
      • Public Pensions
    • State and Local Government
      • Budget and Spending
      • Courts
      • Criminal Justice
      • Municipal Policy
      • Property Rights
      • Transparency
      • Transportation
    • Economy
      • Business Climate
      • Energy
      • Minimum Wage
      • Privatization
      • Regulation
      • Taxes
      • Welfare
      • Workforce
Show Me InstituteShow Me Institute
Show Me InstituteShow Me Institute
Support the Show-Me Institute
  • Publications
    • Essay
    • Case Study
    • Policy Study
    • Report
    • Testimony
    • Other
    • Newsletter
  • Blog
    • Daily Blog
    • Podcasts and Radio
    • Video
    • Infographics
    • Commentary / Op-Eds
    • Events
  • Events
  • Donate
  • About
    • Our Team
    • Show-Me Institute Board of Directors
    • Fellows and Scholars
    • Our Authors
    • Jobs
  • Contact
  • Explore Topics
    • Education
      • Accountability
      • Education Finance
      • Performance
      • School Choice
    • Health Care
      • Free-Market Reform
      • Medicaid
    • Corporate Welfare
      • Special Taxing Districts
      • Subsidies
      • Tax Credits
    • Labor
      • Government Unions
      • Public Pensions
    • State and Local Government
      • Budget and Spending
      • Courts
      • Criminal Justice
      • Municipal Policy
      • Property Rights
      • Transparency
      • Transportation
    • Economy
      • Business Climate
      • Energy
      • Minimum Wage
      • Privatization
      • Regulation
      • Taxes
      • Welfare
      • Workforce
Economy / Taxes

Lower Taxes, More Revenue?

By Corianna Baier on Apr 28, 2022

When a tax cut is proposed, critics often question how the government can function with the loss of revenue. But lowering taxes doesn’t necessarily mean the government will get less revenue, especially in the long run.

While taxes create a lot of adverse incentives, those in favor of tax cuts often predict that a tax cut will create incentives that have a positive effect on the economy. Companies and individuals certainly consider the tax climate when making major decisions (like where to locate or what to invest in). States and cities with lower tax rates may find that many of those decisions work out in their favor.

A recent Wall Street Journal opinion piece gives a few examples of how a cut to the federal corporate income tax changed behavior and seems to have increased corporate income tax revenue. The article notes that corporate income tax revenue is up 22 percent from the previous year for the first six months of 2022. Though there are other variables, the piece concludes, “Lowering the rates while broadening the base by eliminating loopholes created incentives for more efficient investment decisions that paid off for shareholders, workers, and the government.”

States and cities may see similar effects if they cut taxes—like the earnings tax in St. Louis City, as one example. The 1 percent income tax and 0.5 percent payroll tax in St. Louis City only apply to those who live or work within the city limits. This tax incentivizes businesses to locate outside the city, taking their money and their workers with them. It’s understandable why businesses react this way, but it doesn’t help a city that seems to be shrinking every day.

While a reduction or elimination of the earnings tax would be a blow to St. Louis City’s tax revenue, it’s likely that this tax cut would sway business decisions in the city’s favor. Businesses would be more willing to locate in the city now that they wouldn’t be effectively cutting their workers’ pay by 1 percent. After a while, revenue collected from new businesses and workers through other taxes could offset losses from the earnings tax.

Now, does a tax cut guarantee that a government will have more revenue? Of course not; there are many other factors that affect business decisions and tax revenue generation. But this is just some food for thought: lower taxes don’t necessarily mean less revenue.

  • Share
  • Tweet
  • Share
  • Email
  • Print
About the author

Corianna Baier

More about this author >
    Footer Logo
    Support the Show-Me-Institute
    Showmeinstitute.org is brought to you by Show-Me Institute and Show-Me Opportunity.
    • Publications
    • Blog
    • Events
    • Donate
    • About
    • Contact

    Reprint permission for Show-Me Institute publications and commentaries is hereby granted, provided that proper credit is given to the author. We request, but do not require, that those who reprint our material notify us of publication for our records: [email protected]

    Mission Statement
    Advancing liberty with responsibility by promoting market solutions for Missouri public policy.

    © Copyright 2023 All Rights Reserved