re: #287 lostlakehiker

Not much to quote here, but the effect of tax cuts depends on what kind of tax cut we’re talking about. People are remarkably rational with money, even if we’re not perfect at it. A windfall is not the occasion for a higher permanent level of spending. It’s a windfall. You use it to pay down debt, maybe treat yourself a little, and you sock some of it away.

A raise is different. With a raise, you can think in terms of a bigger house, better colleges for the kids, more kids? You can move to a higher permanent level of spending. You’ll still probably sock a fraction of it away. If incomes can go up, they can go down, right?

A tax ‘rebate’ check is a windfall. A tax cut that is driven by relatively permanent political forces, forces sufficient to keep it in force for a decade or two, is another matter. Long term tax cuts paid off big time, both Kennedy’s and Reagan’s.

Turn it around. Permanent confiscatory levels of taxation drag an economy down. Witness the demise of the simple peasant oxcart in Turkey after the Muslim conquest. There was no longer any point in attempting to own this highly portable, very expensive, very useful “means of production”. It would not be yours for long after you bought it, and the things were like modern autos, beyond the skill of the normal household to make for home use.

Entrepreneurial spirits can only exist when the taxation climate leaves the better part of the earnings in possession of those who earn it. Cutting taxes from 70% to 50% to 30% will probably result, over the long term, in a stronger economy and more revenues for the government. Cutting them from there to 20% or 10% might perhaps build the economy a bit more, but the government’s revenue would be reduced. At some point, the govt becomes too weak to perform its core missions and then the essential prerequisite for any type of commerce, a government that enforces contracts and overawes highwaymen and brigands, fails.

I see this fallacy all over the place. Even Laffer admits the Laffer curve doesn’t usually work that way.

The only time ever in American history that reducing tax rates increased revenue was once — in the Kennedy administration when the highest marginal rate was reduced from 90% to 70%. People who make big money for sporadic projects (prizefighters, movie stars) worked more, and people who make big money year round (the Fords, the Rockefellers, etc) stopped shuffling the bulk of their earnings into tax-exempt foundations.

There was economic growth after the Reagan cuts (from 70 to 50, then a little lower still) — but gov’t tax revenue did *not* increase. There just wasn’t enough growth for that. Even with budget cuts, he still exploded the deficit. The economic things he did that were really helpful was about getting inflation/interest rates under control through monetary policy, and adjusting social security. But again, deficits and nat’l debt both still went way up.

When Bush the Elder tried to solve the deficit/debt problem with tax increases, it cost him his party’s support. Clearly it was a good idea — when Clinton raised taxes, we got the biggest peacetime economic expansion ever, and he balanced the budget. 22 million new jobs in eight years, and the stock market doubled.