One of the things that consistently frustrates me the most in teaching is how many students have completely bought into this ridiculous conservative supply-side spin that somehow cutting tax rates actually leads to increased tax revenue through increased economic growth.  Every serious economist will tell you this is just not the case.  And as for this great increase in economic growth (even assuming lower tax receipts) it is most definitely not all that it is cracked up to be.  Maybe if our tax rates were 70-80%, but for top marginal tax rates less than 40%, cuts in the rates only lead to very marginal increases in economic growth at a rather significant cost to government income (which theses days means significant increases in the budget deficit). 

Kevin Drum explains the latest statistics from the Treasury department on this:  Here's the effect of making Bush's tax cuts permanent:

The CBPP has the answer:
it means that in about 20 years the economy would be 0.7% bigger than
it otherwise would be. In other words, instead of a GDP of $20 trillion
in a couple of decades, our GDP would be about $20.1 trillion. Yippee!

Now, you know that the Treasury guys were doing their level best to
make the boss's tax cuts look good. And yet, this was the best they
could come up with. What's more, they even admit that this is an
absolutely best case scenario that assumes massive spending cuts
starting in a few years, something that's plainly not going to happen.
Under more reasonable assumptions, the tax cuts would almost certainly
have either no effect or a negative effect, so the report doesn't
bother with those.”


About Steve Greene
Professor of Political Science at NC State

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