The reason increasing taxes doesn’t increase income to the government long term, but reducing taxes does… or at least can.
In advance, I want to express my understanding that I am oversimplifying what has become a very complex issue. Let me also make clear that this principle doesn’t work ad infinitum (you cannot increase tax revenue by reducing tax to 0%, for example). However, this simple example will express the principle:
Imagine that I am a feudal lord and I have a serf.
My serf is able to produce 100 units of wheat every year.
I tax him 10% each year.
10 units a year.
His family eats 50 units.
He sells 40 units of wheat each year in order to buy seeds to plant the acreage needed to produce the 100 units.
This adds up to the 100 units.
Harvests 100 units
Taxes 10 units
Family 50 units
Plants 40 units
This goes on year after year.
I asked my child what I, as the lord, should do in the case that I realize I want to make more income for some reason. My child answered, “Increase the taxes.”
This is precisely what I would think most Americans would say. They could be correct in the short run (sometimes VERY short), but not in the long run.
I increase his taxes by another 10% to a total of 20%
His new breakdown Year One is:
I now tax him 20 units.
The family eats 50 units (this is a static number, keep in mind).
He has 30 units to plant…
This is 25% less to plant than last time…
So I assume he produces approximately 25% less wheat… now only 75 units are grown.
Harvests 75 units grown
Taxes 20% 15 units (still more than the 10, but less than the 20)
Family 50 units
Plants 10 units (all that is left, unless he is going to starve his family)
He is now planting 75% less than the year before the tax increase.
Harvests 25 units grown
Taxes 20% 5 units
Family 20 units (less than half what they need)
This is an extreme case for the sake of simplicity and I am certainly aware that things are more complex than this, but there is a basic accuracy here. The principle is that the government initially and immediately takes in more, but in the end acts as a virus that kills the host it was drawing from.
In year 3, now the government draws 0 taxes from the serf.