Thursday, April 21, 2016

Tax Cuts Do Not Increase Tax Revenue By Stimulating Growth. But Who Cares?

Nobody likes to pay taxes.  Therefore, cutting taxes is very popular with politicians.  They give small tax cuts to lots of people to win their support for the large tax cuts that they give to those who fund their campaigns.  Tax cuts, along with deregulation, have defined the Republican electoral strategy since the 1980's.  The basic problem with that strategy is that one can't cut taxes without also cutting government tax revenue.  That produces budget deficits unless politicians cut popular spending programs.  One way out of this dilemma is to argue that tax cuts and deregulation will stimulate economic growth.  Economic growth will increase the tax base and pay for the tax cuts.

Since tax cuts are fundamental to Republican electoral campaigns there are lots of economists who come to their rescue.  They argue that consumers will have more money to spend, and that businesses will be encouraged to invest when their after tax return on investment is increased by cutting the tax on business profits.  That has been a compelling story despite the fact that there is no evidence to support the story.  This article provides all of the evidence that any reasonable person would need to dispute the magical story about cutting taxes to increase tax revenue.  For readers who care about data it might matter.  On the other hand, it will not stop Republicans from claiming that tax cuts will pay for themselves by stimulating economic growth.  They have been unable to come up with a better way to fund and win elections.  You may get a kick out of this interview of the Ohio governor who is one of the remaining GOP candidates for the presidential nomination.  He can't really tell the story without enlisting the support of friendly economists who are better at telling the story.  One would think that John Kasich would have learned the story by now.  Kasich was also asked about climate change.  He does not deny climate change but he offers lots of reasons for not doing anything about it.

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