By BombThrowers -- David Hogber——Bio and Archives--March 22, 2017
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[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.
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