Tax Cuts and No-Tax Cuts

The tax cut issue is upon us once again and the usual suspects are throwing the typical hyperbole around–dying in the streets, blood on the sidewalks, starvation, homelessness, etc, etc. Somehow any perceived drop in the share of wealth that government can grab will have an unimaginable effect on the well-being of anyone with less than $20 godzillion dollars.

What’s impossible to get through, to pretty much anyone, is that the percent of the GDP that the federal government captures is relatively unaffected by the tax RATE: the fed gets between 15% and 20% of the GDP. There is some evidence that rate cuts can have a beneficial effect on the economy, giving the government actual increases in tax revenue (as opposed the percent of a given payer’s income), but even that won’t help the deficit much if the same government doesn’t control the real determiner of deficits: spending. Reagan’s efforts did wonders for the employment rate, brought in more tax revenues, and lowered the inflation rate dramatically–something all liberal and many conservative economists claimed could not happened. But the deficit climbed significantly because spending was increased across the board.

There are really two parts to the Laffer curve theory of good economy management: overall tax rates and spending. With an improving economy, the need for government social spending should drop–that is so obvious as to be axiomatic. Except to a politician who can never see a reason for lower spending: after all, the politician has people to whom that money–your money–goes. Try to trim any social program regardless of the circumstances and you’ll get the “dying in the streets” claims, all of which is pure horse-crap. Even most lefties know it isn’t true, they just see it as a good political weapon against libertarians and conservatives.

Finally, the most important tax changes we could hope for is a simplification of the code…which will not happen in any meaningful way–far too many people have skin in the game of tax complexity.

 

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