The argument that the "tax cuts pay for themselves" largely comes from the
left in setting up a straw man misrepresentation of supply side economics. While the tax cuts often
do pay for themselves (like the capital gains tax cuts in 2003 did) they don't
always do so. From
this link:
Myth: Supply-side economics assumes that all tax cuts immediately pay for themselves.
Fact: It assumes replenishment of some but not necessarily all lost revenues. Supply-side economics never contended that all tax cuts pay for themselves. Rather the Laffer Curve merely formalizes the common-sense observations that: Tax revenues depend on the tax base as well as the tax rate; raising tax rates discourages the taxed behavior and shrinks the tax base, offsetting some of the revenue gains; and lowering tax rates encourages the taxed behavior and expands the tax base, offsetting some of the revenue loss.
However, they are
not automatically a loss because people adjust their activities in response to the tax cuts (which was my original point). We will see this when the Bush cuts lapse next year. If the Dems had any interested in truly "helping the little man" they would extend those cuts. Instead, they are insuring a double dip recession by not extending those cuts.
Tax cuts are unquestionably stimulative. Whereas the Keynesian approach to stimulus has been shown to fail. You cannot "prime the pump".
The only way you could think tax cuts are an automatic contributor to the deficit is to use a static analysis which ignores the fact that humans adjust their activity, in both production and consumption, in response to tax cuts and tax increases. This reality will be all to clear next year.
FYI: the CBO as well as the Joint Committee on Taxation (JCT) uses
static analysis, which is why their estimates tend to be practically worthless. They
underestimate the negative impact of spending increases and/or tax increases as well as
overestimating the negative impact of tax cuts and decreased spending. No wonder liberals love to use static analysis.
Here is a decent little blog highlighting the flaws of static analysis:
It is absolutely mind boggling how people continue to confuse higher tax rates with higher tax revenues. Numerous pundits continue to argue that we need to raise tax rates to fund the growing budget deficit. But raising tax rates is one sure way of making sure the budget deficit grows even larger.
There are only two ways to shrink a deficit: 1) Spend less money. 2) Generate more revenue. Spending less money is a great idea, but given all the promises the government has made to various constituents, this is not likely to happen in the near future. Therefore, we must raise more revenue, but that will not happen by raising tax rates.
Higher tax rates are a recipe for reduced employment and slower economic growth (or a more severe recession). Time and time again, we have seen how tax rate cuts have spurred employment, economic growth, and tax revenues. Budget deficits during such lower tax rate/higher tax revenue eras are the result of uncontrolled spending, not the result of less revenue.
Politicians should be clear and honest. Tell us we need more tax revenue, not higher tax rates. Then lower tax rates to make sure we get the revenue we need.
It is also worth noting that most economists are empiricist in nature and Bush's economic advisors where generally
Keynesians. This leads to exceedingly conservative estimates of when it comes to the effect of tax cuts.
The truth is that tax policy was hardly even a factor in this recession. However, Dem's love to use Bush's tax cuts as a scapegoat.
