Do Tax Cuts Increase Revenue?

Every time a tax increase on the wealthy is proposed, the right puts forth a list of tired old talking points. The reality is they simply oppose tax increases for ideological, not practical reasons. However, in order to mask this reality they trot out several false claims, including the false claim that tax cuts increase revenue.

Tax cuts increase revenue

In making this argument, the right claims that tax increases actually deter growth, since investors are less likely to invest their money if it’s simply going to be taxed away.  The inverse of this of course is that lower taxes will encourage such investment, which will create jobs and boost GDP growth which in turn boost revenues, and there you have it; tax cuts increase revenue.  Citing the Laffer curve in a misleading way, right wing pundits argue that tax cuts increase revenue (and for that matter, job creation).

Overemphasizing taxes

The problem with this argument is that it overemphasizes how much of a role taxes even play when it comes to investing.  The level of demand is a more accurate indicator of the likely success of an investment.  If no one is likely to buy a product or service then it makes no difference how low taxes are, since there won’t be any profits to begin with.  On the other hand, if there is profit to be made due to high demand, a few percentage points in tax rates aren’t going to make a difference.  The investment makes sense.

Cherry picking the data on taxes

In support of their argument, right wingers cherry pick a few instances where tax cuts were followed by revenue increases.  They conveniently omit the fact revenue is always increasing because GDP is always growing (recessions being the only exception), including the following of tax increases.  In fact, the revenue increase following Clinton tax increases shames the “increase” following the Reagan tax cuts.  Furthermore, the revenue increase following the Reagan tax cuts were really the increase that comes when recovering from a recession.   With Clinton on the other hand, we see increase even though the economy was at full employment, meaning that as actual economic growth, not just recovery from a downturn.

Donald Trump on taxes

With Donald Trump in office we are likely t see a resurgence of the “tax cuts increase revenue” myth.  Right wing pundits will trot out the Reagan example to make their point, and people who don’t understand economic history will likely fall for the argument.  In fact, anti-tax sentiment has become so vitriol that California governor Jerry Brown has become the target of a smear campaign.

Death and TaxesTax Xut

To be clear, no one in their right mind enjoys being taxed.  It’s the price we pay for living in an advanced society with all the protections and amenities that provides.

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