"Bush" tax cuts

[thibodeaux]

Everybody is sounding off about how extending the tax cuts means less money for fedgov. How do they know this? Hasn't it been demonstrated that reducing tax rates (which is what we're really talking about) actually results in an increase in revenue?

If I were cynical, I would ascribe this as intentional mendacity in the service of class warfare. But since I'm not...I'm just baffled.

[GORDON]

I read somewhere recently that no matter what the tax rate, federal tax income pretty much hovers around 19% of GDP. I didn't do any followup to what I read.



Edited By GORDON on 1291848751

[TheCatt]

Everybody is sounding off about how extending the tax cuts means less money for fedgov. How do they know this? Hasn't it been demonstrated that reducing tax rates (which is what we're really talking about) actually results in an increase in revenue?

No.

There has been... anecdotal evidence both ways in terms of rates and revenues, but it's nearly impossible to prove. Also, it depends on the rates, where you are in the rate curve, etc. Going from 1% to 0% will always reduce government revenues, for example.

[GORDON]

Going from 1% to 0% will always reduce government revenues, for example.

Someone arguing this point ever suggested that nothing is more than something?

[thibodeaux]

There has been... anecdotal evidence both ways in terms of rates and revenues, but it's nearly impossible to prove.

So all the whining about how much the tax cut will "cost" is, of course, BS.

[TheCatt]

Well, it's not BS, since more often than not, it will reduce overall government revenue, causing more deficits. The overall amount is debatable, but it's not necessarily $ for $. We just don't know.

[TheCatt]

I read a good quote in the WSJ the other day, that I wish I could remember. But basically it said "There's no such thing as an economic truth, because the truth changes." Meaning, for example, a cut of tax rates by 1% (say 20% to 19%) may reduce government receipts by 5% under some conditions, or less in other conditions, or more in others. It's unknowable. There's no fixed model for the economy. Which is why people who keep coming up with fixed models (Long Term Capital Mgmt or mortgage issuers) fail so horribly.

The reason the CBO and others use (for example from above) 5% is that it's easy to calculate. It's impossible to know what all the future ramifications of decreased tax rates will be. But its easy to say that cutting the rates will reduce revenue by x% (and generally accurate in the short term).



Edited By TheCatt on 1291862438

[TPRJones]

It's pretty certain that a tax cut will reduce revenues in the first year. In the second year, though, there is where the debate lies. If we could conduct a controlled trial where we cancel out all other factors I suspect we would see an increase because we are far beyond the point of diminishing returns in our tax code. Others would strongly disagree.