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Originally Posted by Bluesman
Also, would it not be the correllary that deccrease in rates DECREASE revenue? I mean, that's almost explicitly stated, right, when you say that tax cuts do NOT 'pay for themselves'.
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Even after accounting for tax-incentive induced growth, the tax cuts we have seen do not pay for themselves. However, because of the dynamic nature of the response, what you don’t see over time is that a 25% cut in taxes results in a 25% decrease in tax revenues, ceteris paribus (this is the fancy Latin way of saying everything else held constant). The decrease in tax revenue is less than that because of tax-incentive induced growth.
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Originally Posted by Bluesman
So, if we increase tax rates, we'll see that same percentage increase in revenue? I'm not sure if there are many examples of that, but I admit I could be wrong.
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This is not the opposite of what I’ve been stating, and it looks at the question/problem from the wrong angle.
First, in general (given a relatively small change), you’d probably see the opposite of what the tax-cuts saw. Most likely, there’d be an initial increase in revenues, but it’d tamp down growth and so you wouldn’t see a directly proportionally increase in tax revenues, but something less over time.
Second, this is really an empirical question where we must analyze behavior on the margin. Are we looking at Kennedy changing the top tax bracket from 90%, or Reagan from 70%, or Bush from 39.6%? A drop from 90 to 70 or 70 to 39.6 is going to change my behavior a great deal as opposed to 39.6 to 35 (or we can look at the opposite scenarios where you increase rates from 35 to 39.6, etc.). I could come up with equally silly scenarios on the extremes of both directions. If tax cuts are so good, why not drop the tax rates to 0%? If tax raises are so good, why not increase the rate to 100%? The point is that the magnitude of the impact of a change in taxes is not going to be same across all the potential rates so it be based on numbers to get the analysis correct.
Next, to explore the supply-side argument a little bit more in depth (warning, I use some basic terminology from econ 101, although it’s part that people love to hate the most), let’s think through the example of labor taxes, i.e., an income tax on your annual earnings. The supply-side argument is that if you tax at a lower rate, then people will substitute away from leisure time towards the now relatively cheaper work time. In other words, less taxes induce me to work more since I get to keep more of it. This is correct; however, it is only half of the story. Because the tax rate is less, my income actually increases without me working a single minute longer, and so I am richer. Thus, I may actually work even less.
It now becomes a matter of empirics, but it’s clear that while some may work more, there will also be some that work the same and some that work less. It will depend on whether a person’s goal is to make as much money as possible or to live a certain lifestyle.
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Originally Posted by Bluesman
If I am wrong, there ya go: solve the deficit by figuring out how much revenue we'll be under expenditure, jack up the rate to cover it, and bingo!, deficit disappears, with no bad effects on the economy.
Gonna have to sell me on that one.
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The problem with this construction is that you’ve created a false dichotomy. In fact, you can use the conservative playbook, which is to lower taxes and cut spending. Unfortunately, we’ve seen the lower of taxes and an increase in spending. The real issue out there is the massive and looming deficits as a result of huge “mandatory” social programs passed under the FDR, LBJ, and Bush 43 Administrations, with the former two being the primary culprits.