Do tax cuts pay for themselves?

Posted at 10:58 AM on August 25, 2010 by Bob Collins (5 Comments)
Filed under: Economy

If you're a curmudgeon -- and, really, why aren't you? -- you're probably a fan of Mark Haines, the morning anchor on business channel CNBC, who isn't shy about "calling shennanigans" when guesswork is disguised as economic theory.

This morning, for example, a guest predicted the Dow will drop to 5,000. "A couple of years ago when the financial world was ending, it only went to 6,000," an incredulous Haines noted.

So it's good news that Haines is a blogger now (and, being a curmudgeon, hates the word blogger). Today, he takes on the question of whether continuing the Bush tax cuts is necessary for a recovering economy:

While President Bush was telling the public that tax cuts pay for themselves, his 2003 Economic Report of the President, pages 57-58, told a very different story:

"Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."

If the President's own report is not convincing, here's a sampling of leading economists' opinions, all of whom have impeccable Republican and/or conservative credentials:

Haines' commentary is informed, biting, and invites discussion. He's a well-hidden treasure in financial reporting. This morning he gave a Wall Street Journal columnist a chance to prove him wrong. Did he succeed? You decide.



Afterward, Haines commented to a colleague, "they're not disagreeing with me, they're disagreeing with the conservative commentators I cited.

Ouch. Bitten by their own words.

In a little bit I'll add another video here of what happens when you leave these sorts of issues to the "we'll have to leave it there" crowd.
Compare:

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Comments (5)

great stuff.

outside the stuffy environs of real economists, most proponents of the 'tax cuts pay for themselves' theory cite a theory that directly refutes the claim, the Laffer Curve. Proponents of such cuts argue that we're always on the high side of the laffer curve - that revenue will always be increased through increased economic activity (despite lower tax rates). Instead, the Laffer Curve shows that there's a 'sweet spot' where revenue is maximized, relative to the tax rate - and that when rates are lowered, revenue falls, despite any increase in economic activity. Of course, this is basically what the report cited above states. Tax cutters: we don't have a top marginal rate of 90% any more.

Posted by bsimon | August 25, 2010 12:32 PM

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The fatal flaw comes when realizing that it doesn't cost government anything to not collect as much in taxes. Welcome to the phony world of government accounting.

Posted by kwatt | August 25, 2010 1:55 PM

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Who was the driver of that second clip.
Why have two politcal people on an econ discussion that dude not believing the GAO numbers kills me.

Posted by bj | August 25, 2010 2:10 PM

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kwatt,

Of course it costs the government money to not collect as much in taxes. If you don't bring in revenue you have to way to pay for programs and policy.

Let's put it this way:

The defense budget is $685 Billion. This includes the areas of:

Operations and maintenance
Military Personnel
Procurement
Research, Development, Testing & Evaluation
Military Construction
Family Housing

(note that housing is roughly the largest) [source for this information]

Imagine if tomorrow the government dropped all tax rates to 0%. How do we then pay our soldiers? How do we feed their families? Where do we get their bullets from? Do these operations suddenly become free?

They always cost time, labor, and resources, meaning they will always cost money. Even if the military budgets was the government's ONLY budget expenditure (it's one even the most conservative people generally agree to be a good one to have) we would still instantly have a $685 Billion deficit.

Posted by JStrander | August 25, 2010 9:48 PM

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Right-wing mythology and ideology will never die,
or fade away. The idea that tax-cuts pay for
themselves is so warm and comforting why would
anyone not want to believe it? Sadly, it's be-
cause it's just not so. Ronald Reagan, biggest
tax-cutter of all time until gw(guess who)? came
along,left huge deficits. Bush the first saw the
error of "voodoo" economics and raised taxes in an
effort to get out of the hole Reagan had created.
No good deed goes unpunished, so Bush the First
lost his bid for a second term. His "read my
lips--no new taxes" didn't help, either. But then
came Clinton who RAISED taxes and left a surplus!
Raising taxes raises revenue. Cutting taxes cuts
revenue. It's as simple as that. Voodoo economics desn't work!

Posted by Richard Walrath | April 15, 2011 12:38 PM

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