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

Do tax cuts pay for themselves?



-- 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.

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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.


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BombThrowers -- David Hogber -- Bio and Archives

Bombthrowers is a blog about politics and the war for the hearts and minds of Americans from a conservative viewpoint.

In line with our name, we do not hold back. We have a take-no-prisoners attitude when it comes to fighting for conservative principles. The Left doesn’t play nice, and that’s why they’ve been winning. It’s time for conservatives to rise up and turn the tide.

We’re not afraid to take on anyone, especially the Washington Establishment—Republican or Democrat.

Bombthrowers is a project supported by the Capital Research Center. Its editor-in-chief is Matthew Vadum.


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