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Originally Posted by dalem
I thought tax cuts (of a certain kind and to a certain point) lead to economic growth, which makes the pie being taxed bigger.
-dale
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Originally Posted by Bluesman
I must be reading you wrong, here. Because almost every single time taxes have been cut, following a VERY modest decrease in revenue, economic activity has increased and the tax cut not only covers itself in short order, but revenues INCREASE.
You have really got me concerned that everything I thought was accepted by even the class-warrior types that seek to soak the wealthy agree that tax-cutting leads to more robust economic activity, and therefore an increase in revenue.
Are you making an arcane point that's getting past us, or do I read you as saying that there is a straight correllation of increases in taxation and increases in revenue?
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Tax cuts have increased growth. However, the problem with simply looking at tax revenues is that you conflate what's going on behind the scenes. Let's look at tax revenues from 2000 and beyond as an example.
2000 2,025.5
2001 1,991.4
2002 1,853.4
2003 1,782.5
2004 1,880.3
2005 2,153.9
2006 2,407.3
2007 2,567.7
As the argument goes, tax revenues create incentives for additional growth (agreed, and it also reduces the incentive to shelter income), which increases the pie (agreed), increases tax revenues compared to prior to the tax cut after people fully respond to the new incentives (agreed), and so they pay for themselves (disagree).
The "pay for themselves" argument requires that every single percentage point of growth HAS to be attributed to the change in behavior due to the tax cut. In other words, the counterfactual would be that if there weren't a tax cut, then there would have been no growth in the economy. In other words, to figure out the impact of the tax cut, you have to isolate growth that is due to the incentives change of the tax cut from growth that would have occured otherwise.
Only once you have done that can you answer the question "do tax cuts pay for themselves?". Here's a
paper description by former Chairman of the Council of Economic Advisors for Bush 43, Greg Mankiw, who supported the tax cuts but not because they would pay for themselves. His conclusion was that in the long-run, capital gains tax cuts in the long-run would reduce revenue only by 50%, while tax revenues would increase by only $0.17 for every dollar cut on income taxes in the long-run.