SouthernDemocrat said:
I am aware of that, but my point is and was that if one is to argue as some on the right argue that tax cuts always equal economic and revenue growth, and that tax increases always equal economic stagnation and revenue decline, then they have to explain why the economy seems to grow every decade regardless of whether there were tax cuts or tax increases and it seems to grow at roughly the same rate.
For example, argueably, much of the GDP growth during the eighties was in the public sector. Moreover, much of the stimulus in the eighties was a result of energy prices declining in the mid eighties and interest rates declining as inflation fears eased.
My point in all of it is that there is little empirical evidence to suggest that what has been termed as "supply side economics" actually works. Then again, its not as though its actual economic science, but rather, its a catch all for what ever think tank inspired idea that rolls off the Wall Street Journal's editorial pages.
The Laffer curve, which underlies the supply side theory, posits that at some level of taxation, incentive is decreased and overall revenues fall. Many conservative supply siders take this as rote, and ignore the other side of the theory which is that at some lower level of taxation, the incentive increased is not marginally great enough to make up for the lower tax rate, and revenues fall. The conservative supply siders tend to ignore this side of the equation and will repeat the mantra that cutting taxes increases government revenues, which is true only at high levels of taxation.
As demonstated earlier, you can see this at the extremes. At 100% tax rate there would be little incentive to work; at a 0% tax rate no matter how much incentive there is there are no revenues.
A cut in the tax rate, by definition, will lower revenue, all things being equal. Because tax revenues equal (roughly) gross income times the applicable rate. Lower the rate, and if gross income remains the same, tax revenues will go down, by mathematical definition.
A tax rate cut will cause revenues to go up only if the
marginal greater increase in economic activity (or more specifically, the incomes that are taxed) is great enough so that additional tax revenues exceed the loss of revenue from the lower tax rate. Whether this happens depends on the marginal tax rate being cut and how it incentivizes people.
Consider for example, 2 scenarios. Scenario A has a tax rate of 90%. Scenario B there is a tax rate of 10%. Now let say there is a tax cut of 5 points. In scenario A, the tax rate is cut from 90% to 85%. People get to keep 15% of their money instead of 10%, a 50% increase, which would probably have an incentivizing effect. The effect on govt revenue is nil, since the tax rate decreased on slightly more than 5%. The 50% greater incentive will quite possibly induce people to work harder, earn more, and make up the 5% loss of of revenue from the tax cut. Supply side economics will work.
Now consider Scenario B. People kept 90% of their money before the tax cut, now they keep 95%. A slightly more than 5% increase. Probably won't incentive them a whole lot. But from the govt revenue side, the tax revenues have dropped from 10% to 5% -- a 50% decrease in revenue. People will have to work twice as hard to make up the difference, which they probably won't do since they are only keeping about 5% more of their money.
A simplified explanation, I agree, but it shows why tax cuts as an absolute rule won't necessarily increase government revenue, and, unless you are at that very high rate of taxation, will cause tax revenues to go down. Which is exactly what happened in the early 80s and 00s.
