Monday, May 15, 2006

Do Tax Cuts Pay for Themselves?

Sebastian Mallaby has a very biting column in today's Washington Post against the idea of supply-side economics. "Nobody serious believes that tax cuts pay for themselves," he asserts. Federal income tax revenues have increased since the 2003 Bush tax cuts but there is no correlation between lower taxes and higher revenue. The reason tax receipts increased was simply that the economy has rebounded out of the post-9/11 recession.

There's probably a lot of truth in this analysis; Mallaby's article is something that advocates of supply-side theory need to respond to. Still, however, it's hard to see a liberal columnist preach about Republican fiscal insanity since his party seems to be incoherent when it comes to taxation. Sometime during the 90s (likely due to a combination of Ross Perot and Bill Clinton), Democrats became the party of taxation, mainly on the idea that high national debts produce high interest rates which in turn harm the economy. Thus, in order to save the economy, you must destroy it by raising taxes. This model seems counterintuitive and certainly the opposite of Keynesian economics which call for tax reductions in times of economic downturn. Of course, the alternative to this would be to cut government spending, but I have yet to see liberal politicians or opinionistas call for reducing government's impact in anything other than the abstract.

Can governments do anything to improve their economy? I think so. But to suggest that the remedies are always to be found tax or interest policy applied exactly the same is doctrinaire and surely futile.

Supply-siders kind of respond: Bullwinkle Blog and Real Clear Politics.

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