Will Massive Tax Cuts Lead to a Business Boom That Will Replace Lost Government Revenue?

This is a key principle for Republicans. Cut taxes and the economic activity will increase, if not explode. What about the loss of government revenue from these tax cuts? Don’t worry, conservatives say, the economic boom that results from the tax cuts will be so large that it will cover most, if not all of the lost revenue from taxes. My understanding is that this idea has little merit, and there’s an interesting story from NPR’s Planet Money podcast that reinforces this. The podcast is about the Governor Brownback’s attempt to implement tax cuts based on this principle in Kansas.

Short answer: it didn’t work. Indeed, The Atlantic has an article with Kansas Republicans warning that the GOP tax plan for the federal government, based on a similar principle, won’t work either.

Here are two interesting things I got out of the article.First of all, reducing or eliminating specific taxes might work if you offset these in some other ways. That is, you find other sources of revenue. For example, you can eliminate or reduce deductions or create a tax for something else, or make spending cuts. But the article suggests that these offsets can be politically difficult, if not impossible. The result is that you can have these massive tax cuts without having other ways to make up for these lost revenues. And the evidence so far suggests that the economic growth won’t make up for these losses.

The second point is that tax cuts isn’t about growing the economy, but shrinking the government:

“This is designed to shrink government. It is not designed to grow business,” state Representative Stephanie Clayton told me. “I’ve seen it. It shrinks government. It doesn’t grow business.”

The article mentions that the Koch brothers supported this approach and still do. It makes sense. Wealthy individuals like that don’t care if government can do less because they don’t depend on government services. Therefore, they prefer government does less because this means the government is spending less, which probably means they have less money, which means the government is taxing less. In short, the proposal seems like a scam perpetuated by wealthy individuals and groups.

1 Response to “Will Massive Tax Cuts Lead to a Business Boom That Will Replace Lost Government Revenue?”

  1. Reid

    I haven’t be closely following the current attempts to change tax policy, but the vague sense I’m getting is that the GOP is basically trying to employ the same trickle down approach. From what I understand, the GOP partly justifies their tax cuts for corporations, arguing that the savings will lead to an increase in investment/spending in the economy and/or wages. Here’s Senator Sherrod Brown’s response to that, with a response from Senator Orrin Hatch:

    Where do you guys stand on this? To me, Sen. Brown’s point seems compelling: Corporations have money now, but my sense is that wages aren’t really going up that much. If that’s true, why would giving more money to corporations via tax cuts lead to an increase in wages?

    According to an NPR story, Gary Cohn, the White House Economic Adviser, went to a Wall Street event and asked how many would increase investment if they got a big tax cut. Only a few hands went up.

    NPR spoke to an economist, Kimberly Clausing, from Reed College (very liberal, from what I understand) to find out why that is. Here’s part of her response:

    A lot of what’s holding back investment right now has nothing to do with a scarcity of after-tax profits. In fact, if you look at multinational firms, most of them have record-high after-tax profits compared to earlier years or earlier decades. Instead, what seems to be holding back investment is lack of good investment opportunities.

    So for instance, if the middle class is struggling, that gives you fewer items that you could sell to the middle class and then less incentive to invest in factories to make those items. So I think most companies are not so much wanting for funds but wanting for things to invest in.

    This is the type of argument I’ve heard from economists like Robert Reich, who, like Clausing, think giving money to the middle class would be better, because the middle class would be more apt to spend the money which would increase demand and lead corporations to invest, increase productivity, and higher more people.

    To me, this approach sounds way more persuasive. Where do you guys stand on this?

You can add images to your comment by clicking here.