[CWuestefeld]

You're mostly right, and in my opinion the government needs to cut its spending very significantly.

However, you're confusing tax rates with tax revenue. It's quite possible that increasing the rate can lead to a net decrease in total tax revenue. And in some cases, lowering the rate can lead to an increase in revenue. This is known as the Laffer curve. See https://secure.wikimedia.org/wikipedia/en/wiki/Laffer_curve

While this concept is the subject of some controversy, it's demonstrably true at the extreme. Raising the rate to near 100% will clearly decrease revenue. But on the other hand, decreasing it to 0% will also decrease revenue. But with more moderate values, it's really anyone's guess as to whether it will hold or not.

It's the same in business, really. One's revenue can increase by decreasing prices: more people will buy your product, and that may be enough to offset the per-unit loss.

What's really controversial is the question over how much people will forgo additional income due to changes in marginal tax rate. There are certainly boundary conditions, such as when the amount you finally take home after taxes is less than your cost for child care. More fuzzy is when the amount you take home is less than your value for free time.

[Locke1689]

The Laffer curve isn't really relevant here. Pretty much every economist in the country agrees that we're left of the max on the curve.

[msluyter]

But with more moderate values, it's really anyone's guess as to whether it will hold or not.

I recently read a discussion about this in the NY Times in which economists tried to pinpoint the inflection point of the Laffer curve. Most put it between 30-60%, and iirc, the majority were on the 60% side of things. I can't find that discussion now, however.