If you read right-wing blather, you will see "every country in history which went into decline did because of high taxes." Not quite. One frequent (all universals are wrong, including this one) cause of national decline is tax exemptions.
In pre-revolutionary France, church lands were exempt, and the aristocracy was exempt from many taxes. It was fairly easy to move land (the major wealth of the time) into the possession of the church for tax purposes while most of the produce benenfited the family of the original owner.
More examples after the jump.
The problem in Imperial Rome was less that of official exemption than of tax avoidance. Imperial taxes were "farmed." That is to say that some rich guy would pay a certain amount to the governent for the right to collect taxes on a particular province. Then he would go to the province with the right of collecting whatever had ben levied. He got to keep what he collected. Large landholders with a stronger fighting force than the tax-collector's ended up paying very little. It was even harder to collect local taxes from such guys. At one point, small peasants were paying almost all of the taxes. Later, they found that they could turn title to their property over to the large landholder and farm it for rent lower than the tax burden. Feudalism in utero.
I first saw this pattern laid out in East Asia: the Great Tradition. New dynasties came to the throne of China and exempted their closest supporters and immediate family from taxation; as time went on, descendants of these came to own so much of the productive wealth of the empire that it was hard to raise enough revenue to pay the costs of the government. The government went into decline until a new dynasty took over and started the pattern again.
The pattern is easy to understand, after all.
When government revenue pays for public services, the general level of taxation is matched by the general level of social goods received. Early America had few taxes for roads, but those who wanted to travel had to pay toll for road upkeep. European workers have taxes taken out of their pay for the cost of medical services, while US workers have premiums taken out; it makes less difference in how much you can spend on yourself than wingnuts pretend.
When only some pay the taxes, however, the taxes on the rest are higher without the benefits being higher.
There is the further cost of tax avoidance. The Roman peasants transferred their land into the hands of people who were powerful enough to snub the tax collectors; the free peasants became the ancestors of serfs.
In the US system, businesses and farms pay on their profits (receipts less costs) rather than on their receipts. Investments aren't costs, but various kinds of business, farms for one, are allowed to pretend that they are. That cuts down on your taxable income. One year, it was discovered that the bracket of people with the highest total income had negative farm income. Now, trying to farm and losing money is not unknown, but these guys weren't trying to farm, they were buying farms while getting their money elsewhere. Why invest in a farm which was losing money? Well, they were only losing money for tax purposes. And doing so was taking a good deal of effort and services that could have gone into productive effort. It was also cutting down on the family farms that we are told are so valuable to our society, sometimes told that to justify the same tax loopholes that encourage the shift in ownership to rich investors.
If you buy a company and sell it in 20 years for much more, that increase in value is called "capital gains" for tax purposes. (It's actually called "profit" in general discussions.) You don't have to pay taxes until you sell the company, for obvious reasons.
Say that Smith buys Ajax and sells it after 10 years at double the price, pays his tax, and then he buys Bagel with his after-tax receipts and sells it after another 10 years at twice the price, and pays that tax. Jones buys Kappa and sells it after 20 years at 4 times the price and pays his tax. Jones will end up with more after-tax money than Smith has. Keeping your investments where you placed them instead of moving them around has tax advantages. Investment theorists think that this distorts the investment market (although the same investment theorists think that the investment market is undistorted, "perfecct.") There are two ways to avoid this effect -- tax increase in value in the year it occurs, and don't tax increase in value at all.
The first has obvious problems for companies or farms although it is perfectly practical for marketable securities. The second distorts the finance market in other ways; it makes shares of a company much more desirable than bonds of the company.
The solution pushed by the spokesmen for the rich, and accepted by congress, is to tax capital gains more lightly than other income. This decreases but does not end the distortion of the investment climate, and -- of course -- every time the tax rate changes or is expected to change, it distorts it more. The lower level of tax was justified by the picture of long periods of investment in entire companies or farms, but it also applied to the purchase of stocks and for periods of time as short as six months.
Much of what I've written is a little out of date. They are the tax loopholes I learned when I studied them. In Reagan's first term, they lowered the tax rate, especially on the highest incomes. Neocons promised taht this would make people abandon using tax loopholes. When it didn't, Reagan's treasury department in his second term proposed removing many tax loopholes. Instead of the benefits going to people who did particular things, they would go to people of the same income class.
Changes were made by both Bush I (pass some of the benefits from the very richest back to the moderately rich) and by Clinton (raise taxes on the highest incomes and restore the capital-gains benefit there).
Now, Bush II has provided som big tax breaks to the highest tax brackets and proposed removing taxes on about half of all unearned income. Every tax break of the past (except for those involved in more general rules) is still on the table.
