Do tax cuts pay for themselves?

Canada Free Press ^ | 03/22/17 | David Hogberg

[Sean_Anthony]

Cutting taxes isn't enough -- spending must be reduced

Many Republicans still believe that tax cuts will unleash so much new economic activity that the tax revenue from that new activity will pretty much make up for any revenue foregone by cutting taxes.

Columnist Megan McArdle notes that the GOP has been down this road before, most notably in the 1980s:

[mountn man]

Show me years in which federal tax cuts were made, where tax revenues dropped substantially

[NorthMountain]

The question is wrongly posed.

Why are we heavily taxing ourselves to pay for unconstitutional Big Government?

[Uncle Miltie]

Depends on the slope of the Laffer Curve when the cuts are made.

In other words, usually.

[TADSLOS]

Skip the blogbot clickbait. Full article here:

—BombThrowers Many Republicans still believe that tax cuts will unleash so much new economic activity that the tax revenue from that new activity will pretty much make up for any revenue foregone by cutting taxes.

Columnist Megan McArdle notes that the GOP has been down this road before, most notably in the 1980s:

[Republicans] who expected great things from tax cuts were essentially hoping that labor supply was very elastic; if you changed the price people got for working, they’d respond by working a lot more. It turned out to not be not nearly as responsive as hoped, in part because this mental model of how markets worked was incomplete.
In simpler terms, tax cuts do not pay for themselves. Put in a slightly more complicated way, tax cuts do not generate enough extra activity to make up the missing revenue.

Here’s a hypothetical example that demonstrates what she is talking about. Say Angela earns $100 an hour in her job, and she pays a flat 10 percent tax rate. Thus, the government gets $10 in taxes for every hour she works.

Now, let’s say Congress cuts the tax rate to 5 percent. To make up the $5 that won’t be coming to the government, the tax cut will have to incentivize Angela to work twice as hard — or at least hard enough to earn $200 an hour. Chances are, she’s not going to do that. It might incentivize her to put in some extra work, perhaps to the point she earns $120 an hour. So, now, one dollar of the foregone $5 is made up ($20 * .05 = $1). But the government is still short $4.

Now, Angela’s desire to work harder isn’t the only impact the tax cut will have. Say Marc wants to create a job that earns $40 an hour, but he didn’t want to do it when the government took $1 out of $10. Now that the government will only take 50 cents of every $10, taking the risk of creating that new job is worth it to Marc. If Marc succeeds, then the government will get another $2 in revenue each hour Marc works, meaning the government will take in $8 in revenue an hour. That’s good, but you still need to find a way to cut back on spending by about 20 percent to keep the budget from going into a deficit (assuming of course that the government isn’t already in a deficit, a risky assumption because, well, politicians.)

There are many good economic reasons to cut taxes right now, especially the corporate income tax. But to keep the federal budget deficit from ballooning even more than it is will require cutting spending. President Trump has released a budget that not only cuts spending but actually eliminates many government agencies. Congressional Republicans will have to find the fortitude to follow suit.

If that last sentence makes you a bit despondent, well, don’t worry. The current fight over repealing Obamacare has shown quite a few Republicans, including Tea Party darlings like Senator Joni Ernst (Iowa), will cave.

So it’s up to conservatives and libertarians to keep the pressure on the congressional GOP to hold the line. Otherwise, expect to hear the claim that tax cuts pay for themselves a lot.

[econjack]

In simpler terms, tax cuts do not pay for themselves. Put in a slightly more complicated way, tax cuts do not generate enough extra activity to make up the missing revenue.

Bullcrap. Instead of making up a hypothetical answer, just look at the statistics after every major tax cut (e.g., the Kennedy and Reagan tax cuts). In each case, economic activity rose following the tax cuts. For additional theoretical perspective, look at the Laffer Curve and its statistical support. This clown has no clue about the statistical evidence.

[PGR88]

The question assumes that the funding of government is the ultimate goal and ultimate good. That is immoral and false.

The needs of government NEVER should take precedence over the rights of citizens to their own property.

[econjack]

Now, let’s say Congress cuts the tax rate to 5 percent. To make up the $5 that won’t be coming to the government, the tax cut will have to incentivize Angela to work twice as hard — or at least hard enough to earn $200 an hour. Chances are, she’s not going to do that. It might incentivize her to put in some extra work, perhaps to the point she earns $120 an hour. So, now, one dollar of the foregone $5 is made up ($20 * .05 = $1). But the government is still short $4.

This has nothing to do with the labor force. It has to do with spending. This example totally ignores the multiplier effect, which is 1/1 - MPC where the MPC is the Marginal Propensity to Consume. If people manage to save 10% of their income, the MPC is .9, which yields a spending multiplier of 10. So every tax dollar that ends up in the pocket of consumers ultimately ends up generating $10 additional spending. People need to learn some basic economics.

[Owen]

This is a legitimate question, which conservatives stuck with Old Normal thinking would instinctively conclude as . . . yes, of course tax cuts pay for themselves, via economic stimulus.

But that was all pre 2007 Apocalypse. It was pre 20 Trillion in debt. It was pre collapsed Labor Participation Rate and it was pre automation.

If you cut taxes, in a world where Quantitative Ease simply printed $4 Trillion over the past 6 or so years (that’s a full 1/4 of GDP) on a whim, there could be no evidence it would achieve any stimulus effect. All the stimulus possible should be in the system when you just wave your hand and create $4 trillion from nothingness.

The tax cut would clearly add to deficit. But QE has reduced rates to nearly zero, so that deficit doesn’t really add to the debt — but it doesn’t add to anything else either.

Remember, in a world of automation, a company making more money (via lower taxes) doesn’t hire more people. It just sends the money to shareholders. The business doesn’t expand. They just buy back their own shares.

Point being, it’s a valid question that doesn’t have an obvious answer anymore.

[central_va]

Look at revenues in the 1980's they went from $500B to $900B, almost double.

And also note the 1960's $90B to $190B.

Facts don't lie.

FY 2017 - $3.632 trillion.
FY 2016 - $3.276 trillion.
FY 2015 - $3.250 trillion.
FY 2014 - $3.021 trillion.
FY 2013 - $2.775 trillion.
FY 2012 - $2.45 trillion.
FY 2011 - $2.3 trillion.
FY 2010 - $2.16 trillion.
FY 2009 - $2.1 trillion.
FY 2008 - $2.52 trillion.
FY 2007 - $2.57 trillion.
FY 2006 - $2.4 trillion.
FY 2005 - $2.15 trillion.
FY 2004 - $1.88 trillion.
FY 2003 - $1.72 trillion.
FY 2002 - $1.85 trillion.
FY 2001 - $1.99 trilion.
FY 2000 - $2.03 trillion.
FY 1999 - $1.82 trillion.
FY 1998 - $1.72 trillion.
FY 1997 - $1.58 trillion.
FY 1996 - $1.45 trillion.
FY 1995 - $1.35 trillion.
FY 1994 - $1.26 trillion.
FY 1993 - $1.15 trillion.
FY 1992 - $1.09 trillion.
FY 1991 - $1.05 trillion.
FY 1990 - $1.03 trillion.
FY 1989 - $991 billion.
FY 1988 - $909 billion.
FY 1987 - $854 billion.
FY 1986 - $769 billion.
FY 1985 - $734 billion.
FY 1984 - $666 billion.
FY 1983 - $601 billion.
FY 1982 - $618 billion.
FY 1981 - $599 billion.
FY 1980 - $517 billion.
FY 1979 - $463 billion.
FY 1978 - $399 billion.
FY 1977 - $356 billion.
FY 1976 - $298 billion.
FY 1975 - $279 billion.
FY 1974 - $263 billion.
FY 1973 - $231 billion.
FY 1972 - $207 billion.
FY 1971 - $187 billion.
FY 1970 - $193 billion.
FY 1969 - $187 billion.
FY 1968 - $153 billion.
FY 1967 - $149 billion.
FY 1966 - $131 billion.
FY 1965 - $117 billion.
FY 1964 - $113 billion.
FY 1963 - $107 billion.
FY 1962 - $100 billion.
FY 1961 - $94 billion.
FY 1960 - $93 billion.

Look at revenues in the 1980's they went fro 500B to 900B, almost double.

[Owen]

errr add to debt = add to interest

[Rashputin]

Spending cuts damn sure pay form themselves. There are entire departments and agencies the Federal Government should and could shed turning those functions back over to the States. Then cut taxes and let the States fight over whether to raise taxes or take care of things for far less than it costs the Federals to do it.

This is horesh*t. All these liars in Congress that claim to be Conservative are as allergic to the idea of cutting spending by reducing Federal power as the fascist democrats are.

I guess that pretty much makes Ryan and McConnell the new leaders of the democrat fascist party.

[central_va]

The tax cut would clearly add to deficit.

That's pure BS. Tax cuts in the 60's and 80's exploded revenues - UPWARD.

LInk here.

[ImJustAnotherOkie]

They may pay for themselves in terms of money and tax receipts, but they will never pay for themselves in terms of Power and Control.

[DoodleDawg]

Look at revenues in the 1980's they went fro 500B to 900B, almost double.

And spending went from $591 billion to $1.253 trillion, too.

And also note the 1960's $90B to $190B.

Spending went from $92.2 billion to $195.6 billion.

Increase in revenue from tax cuts, when it happens, is never enough to offset the increase in spending.

[jr3000]

I'm sick of that stupid question. Tax cut means giving the tax payers back their own money. No one pays for tax cuts. People pay for taxes. Half our money goes to taxes. There should not be union-wide taxes. We should pay a little bit of taxes to our host state. And DC has to request money left over from each state. You hear Uncle Sam all the time. But have you heard of Brother Jonathan? Today we hear "the United states is...". But before the civil war it was "the United States are". What's the difference you say? Research time! Its a collection of states.

[conservatism_IS_compassion]

Two-step process:

1. Cut the Capital Gains tax rate to 10%

2. Install a water-cooled cash register to accept the increased receipts.

[mountn man]

The go-go '80's happened with comparatively high interest rates.

We've already seen a bump in growth, just from "hope" in Trumps agenda. Add lower taxes AND low interest rates, and look out.

Just heard a few days ago, that DHS now says that illegal invaders have dropped 60%, from 40% just a few weeks ago. DHS' numbers WERE 700,000 invaders a year. 700k at 60%, that's 420k less invaders a year. Add to that the amount that self deport or federal deport and job numbers will explode.

[Owen]

You do realize that’s 30 yrs ago? 18 Trillion in debt ago? 30 yrs of automation ago? About 5% in LPR ago?

As of 2007/8 it became a new world where central banks create money on a whim and suffer no consequences because they all cooperate.

This has rendered history meaningless. History is from a different world. There is no history.

[sickoflibs]

RE:”Columnist Megan McArdle notes that the GOP has been down this road before, most notably in the 1980s”

And 2000s under GWB. Where did deficits go then?

Libs have a mirror fantasy theory they use, that spending pays for itself through increased tax revenue

Somehow the tax cuts and spending increases always result in borrowing regardless of these claims.