Lawyers and economists know that there are two primary purposes of taxes: one is to raise funds for the government; the other is to discourage activity. If we want less of something, we tax it. For example, if the federal government raised the tax rate on cigarettes or alcohol, it might raise more revenue, but the primary purpose of the tax is to discourage the activity taxed, to change behavior.If the purpose of the tax is to raise funds for the government, the tax rate must not be too high, or the government will collect less than if it had set the rate lower. Lower tax rates can produce more revenue than higher tax rates for the same reason that Wal-Mart, with its lower prices, makes more money than Tiffany & Co. For example, when the United States has lowered the capital gains rate, it has collected more in capital gains taxes. When it raises the rate, it collects less in taxes.
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