Tax Cuts Do Not Increase Revenue

Posted on 04/02/2009 at 7:59 am by Bob Cesca

Anonymous Liberal:

We’ve lowered marginal tax rates multiple times, and it never produces more revenue. Even the most ardent supply-side economists don’t believe that tax cuts fully pay for themselves (they believe only a fraction of lost revenues are offset by supply-side effects).

… virtually all mainstream Republicans are now complete crackpots. Which goes a long way toward explaining why the Republican party’s budget proposals make absolutely no sense. How can you craft a coherent budget when your only idea for raising revenue is to massively cut revenue?

Republicans will point to rising government revenues in the years following the Bush tax cuts for the super rich. They conveniently overlook the fact that every year the population increases and, at least outside of recession, the economy grows every year. Tax cuts have nothing to do with the increased revenue. You can’t turn down income and expect more income. Unless you’re a crackpot.

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  • SillyRatfacedGit

    I have long suspected that Republican and Crackpot were synonyms. Time to update the Thesaurus since it looks official now.

  • CJ

    Bob– That was Steve Benen, not Anonymous Liberal.

  • CJ

    Whoops. Sorry. That was Benen quoting A.L.

  • http://nanotyrnns.blogspot.com/ Nanotyrannus

    I think their argument is supposed to be if you give a tax cut to the rich, the business owners, the creators of jobs and wealth, they will then say “Wow! I have this extra money! I can hire more workers and create more jobs and wealth!” when really what they say is “Wow! It’s about time all that lobbying paid off! Now I can sock away a few extra hundred thou into more investments that I wont have to pay taxes on because all that lobbying is finally paying off too!! And oh yeah, fire a few hundred more employees for no reason to keep the rest shitting-in-their-pants scared at what might happen to them.”Why some of these poor rubes buy into the idea that one day they too will walk among the elite in The Hamptons if only they support the rich guys just a little harder is beyond me. I just can’t fathom it.

  • EconProf

    “Tax cuts have nothing to do with increased revenue”I will refer you to the actual Obama economists that drafted the stimulus bill. In her paper “The case for fiscal stimulus” Christine Romer states:Christina D. RomerFebruary 27, 2009The Case for Fiscal Stimulus:The Likely Effects of the American Recovery and Reinvestment Act page 4″A tax cut of 1% of GDP raises GDP bybetween 2 and 3% over the next three years.”Still can’t wrap you mind around this? Try for a moment to imagine the ultimate tax cut to illustrate the point…no federal taxes at all. Imagine all the people who now have hundreds or even thousands more income to spend every month. What would the people do with that extra money? Spend it for the most part; they would buy cars, houses, furniture, TV’s you name it, that would be the “stimulus” effect of the tax cut in this example. And of course, on allof this increased economic activity, there are taxes to be collected, i.e revenue to the Government.The statement “only a fraction of lost revenues are offset by supply side effects” means what? It means that the people who get the tax cuts don’t always spend 100%, they save some too, so that reduces the number to a certain extent, which is taken into account by Romer’s multiplier.Take Christina Romer’s word for it.”A tax cut of 1% of GDP raises GDP bybetween 2 and 3% over the next three years”I would suggest that the general use of the term “crackpot” should be used in restraint. By your own use of this term, you have attributed that attribute to Obama’s economic advisor who along with David Romer, drafted the stimulus bill.

  • Econprof

    Nanotyrannus;I read your post after making mine. Your points are well taken. I advocate tax cuts for the middle class and below, not the wealthy. My post was to address the issue of the principle of tax cuts relative to revenue and the relationship between the two, and not to the suggested plans of Republicans. Those are two entirely different matters.

  • CJ

    Econprof,The issue raise in the post wasn’t whether tax cuts raise GDP; the issue was whether tax cuts produce more tax revenue (i.e. “tax fairy”).As I recall, Bush cut taxes in his first budget and again a few years later. But although GDP grew (albeit sluggishly) throughout most of his term, it took up to six years under Bush to match the annual tax revenues that Clinton had during his last year in office. As I said, GDP growth and revenue growth are two different metrics.As originally asserted…crackpots.P.S. – You started your hypothetical scenario with “no federal taxes at all” and ended it with “on all of this increased economic activity, there are taxes to be collected”. Sorry, but you can’t have it both ways–you can’t have no taxes and more revenue (perhaps you should consider a new line of work).