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> We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity

> We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one. This is kind of an embarrassing mistake for an economist. The theory that lower taxes can increase tax revenues is that they increase the rate of GDP growth. For example, with a lower tax rate, GDP might grow at 8%/year instead of 4%/year. Under different circumstances the difference might be larger or smaller, but as long as the lower tax rate improves GDP growth at all, compounding will eventually cause it to yield higher tax revenue at the lower rate. 20% of 1.08^15 is more than 35% of 1.04^15, and 20% of 1.08^50 is more than 370% of 35% of 1.04^50. This doesn't have to be an instantaneous effect for it to be real.

frikskit 2y ago
Redo your analysis with something less absurd than 8%. For example 4.5% and you see no improvement in 100 years. 5% growth and it takes 59 years. Historically major tax cuts in the US increased GDP growth by -1 to 1.5%. You bring up a good point but in all realistic scenarios it actually misleads.
- AnthonyMouse 2y ago
  The actual numbers depend on the state of the economy, but you can't just lower the one without considering the others. Historically "major tax cuts" were actually very small: https://fred.stlouisfed.org/series/FYFRGDA188S https://fred.stlouisfed.org/series/FYFRGDA188S These were tax cuts on the order of 1-3% of GDP, so of course the effect on GDP growth was similarly muted. Meanwhile the baseline level of recent US GDP growth isn't 4%, it's more like 2.5%, making a 0.5% increase much more significant for such a small tax cut, so it's not absurd that a hypothetical doubling of the growth rate could result from a hypothetical 15% of GDP reduction in taxes. The hypothetical was just using larger numbers on multiple dimensions. You get a similar payback period if you use smaller numbers all around, e.g. a reduction in the overall tax rate from 23% to 21.5% resulting in an increase in the GDP growth rate from 2.5% to 3%. Moreover, the exact rate is difficult to calculate given limited data (and depends on changing factors in the economy), but the point is the existence of the effect. And it's not obvious that even quite long payback periods wouldn't be worth it, since the lower tax rate and the higher growth rate could then be sustained thereafter indefinitely.
  - pyrale 2y ago
    > "major tax cuts" were actually very small [...] on the order of 1-3% of GDP 3% of the GDP in tax cuts is pretty enormous. > a hypothetical 15% of GDP reduction in taxes. For reference, total federal spending was 23% in 2022. Total government spending was 36% in 2023. So let's say you want to cut 15 of that 36%. That would mean cutting all of health care + all of pensions, or all of health care + all of education. Or defense + pensions + infrastructure. Good luck doing that.
    - AnthonyMouse 2y ago
      > 3% of the GDP in tax cuts is pretty enormous. It's a <10% reduction in total taxes. It's only enormous if the assumption is that taxes never really go down as a percent of GDP (even in the face of per capita real GDP growth), which has been the case in recent history, but that's kind of the issue. > So let's say you want to cut 15 of that 36%. That would mean cutting all of health care + all of pensions, or all of health care + all of education. Or defense + pensions + infrastructure. The obvious thing to do would be to increase the efficiency of each thing rather than cutting any particular thing entirely. Defense spending is full of notorious boondoggles and waste. US healthcare spending goes to a highly captured industry with a large amount of bureaucratic overhead and could be made significantly more efficient, e.g. if US healthcare spending per capita was on par with Canada then healthcare spending could be reduced by more than the identified amount percentage-wise. Social security, by contrast, isn't exactly "waste" but the program is extremely poorly tailored to its intended purpose of providing a baseline for the elderly, because it pays out higher benefits to people who made more money and can be correspondingly expected to have more savings and need it less. A far more efficient program would be to provide the same amount to every retiree. Enacting that change would be politically difficult, just like making the US healthcare system more efficient would be politically difficult, but the question here is not "how hard would it be to get the votes for this" but rather "if we actually did this, would we be better off"?
rstuart4133 2y ago
> This doesn't have to be an instantaneous effect for it to be real. For the effect to be real business has generate more growth with the money than the government spending the money does. In most cases private enterprise clearly is more efficient that the government in the long term. In other cases, like health, it's clear from the USA example that government can supply better services for cheaper, freeing resources to further fuel to capitalist engine. This is probably true for other stuff we traditionally get our governments to manage like roads, k12 education, and local power and water distribution. If you can lower taxes so much private enterprise takes these functions over, the end result would be the same as you see for USA health - GDP goes backwards rather than forwards. Then there is this reality: most of these tax reductions have been funded by government borrowing. The businesses could have borrowed those funds on the market. The net outcome is you are not reducing the level of government influence on the economy, you're just re-arranging the deck chairs, and doing so in a way that favours the business owners who now effectively get the funds interest free, with citizens (who are also their employees) paying it instead. Given that the House Republicans unveiled blueprint to extend $4.5 trillion in tax cuts and lift the debt ceiling and that their current major backers are these super rich business owners, it's hard not to be a little cynical. [0] https://apnews.com/article/house-republicans-budget-blueprint-trump-tax-cuts-ff2bddf31f4e7cb0928139072392a091 https://apnews.com/article/house-republicans-budget-blueprin...
- AnthonyMouse 2y ago
  > For the effect to be real business has generate more growth with the money than the government spending the money does. That is correct but it was also taken as a premise in the original claim and seems fairly plausible in general. In particular, government services would expect to have diminishing returns, so there are some threshold level which are worth the candle but as you exhaust the low-hanging fruit, further spending yields less public benefit than for the taxpayers to keep the rest of their money. > In other cases, like health, it's clear from the USA example that government can supply better services for cheaper, freeing resources to further fuel to capitalist engine. This isn't really the best example. The US healthcare system is highly dysfunctional in terms of costs, but basically all other countries have significantly lower costs regardless of whether their system is public or private, so that doesn't appear to be the distinguishing factor causing the dysfunction in the US. But there are things governments could be better suited for, e.g. because they involve pricing major externalities or large fixed investments with a diffuse public benefit. Hardly anybody is suggesting that there shouldn't be one. The question is, are there things the government is currently doing that aren't worth the candle? Because the cost of that compounds over time. > Then there is this reality: most of these tax reductions have been funded by government borrowing. The businesses could have borrowed those funds on the market. This is actually an interesting question of a similar nature, because the government will generally be paying a lower interest rate than the corporate bond rate, and causing the economy to pay less interest to capital on borrowed money is probably an advantage. In theory the interest could then be paid from the increased revenues resulting from a stronger economy, but whether this is worth it depends on the interest rate, which gets a lot more expensive when it isn't zero anymore. > doing so in a way that favours the business owners who now effectively get the funds interest free, with citizens (who are also their employees) paying it instead. The implication here is that the businesses would be the ones to receive the cuts but taxes would then be increased on the employees to pay the interest. There are other things that could be done than that. > Given that the House Republicans unveiled blueprint to extend $4.5 trillion in tax cuts and lift the debt ceiling and that their current major backers are these super rich business owners, it's hard not to be a little cynical. The cynicism is often warranted but there is also a lot of partisanship in the complaints. Saying "$4.5 trillion" is an obvious one; that's the sum total over a period of years rather than the difference in the annual budget and includes a lot of money that goes to W-2 employees rather than billionaires. Meanwhile if you actually want super rich business owners to have less money the biggest thing you can do isn't related to top tax rates (which they generally find ways to avoid regardless), it's to increase the competitiveness of the markets in which they're extracting all of that lucre. It's better to make them give the money to the consumer as lower prices than try to hope the government can both take it from them and then not have it get lost in the pockets of some government official's cronies. But neither of the parties has historically been good at that, which is why we're in a bit of a mess.
pyrale 2y ago
That person speaks about the money not taxed being used for taxable economic activity on the same year, as opposed to that same money being spent on government programs, that generate less taxable revenue (e.g. because while paying contractors will generate taxable revenue, hiring a public servant to do the same job won't). Your reasoning is that the money spent by private people can also be investment, which will increase future gdp growth. However, you don't explain why government spending couldn't increase future gdp growth. Obvious counter-examples being money spent in schools, public research programs, etc.
- AnthonyMouse 2y ago
  The comment claims that it isn't possible for lower taxes to increase tax revenues. It's possible whenever the taxpayers would have used the money more productively than the government. Which may not always be the case, but it's certainly possible for it to be the case, and indeed is not an implausible default assumption because governments generally aren't subject to competitive pressure and consequently tend to allocate resources in ways susceptible to inefficiency, waste and corruption.

frikskit 2y ago

Redo your analysis with something less absurd than 8%. For example 4.5% and you see no improvement in 100 years. 5% growth and it takes 59 years. Historically major tax cuts in the US increased GDP growth by -1 to 1.5%. You bring up a good point but in all realistic scenarios it actually misleads.

AnthonyMouse 2y ago
The actual numbers depend on the state of the economy, but you can't just lower the one without considering the others. Historically "major tax cuts" were actually very small: https://fred.stlouisfed.org/series/FYFRGDA188S https://fred.stlouisfed.org/series/FYFRGDA188S These were tax cuts on the order of 1-3% of GDP, so of course the effect on GDP growth was similarly muted. Meanwhile the baseline level of recent US GDP growth isn't 4%, it's more like 2.5%, making a 0.5% increase much more significant for such a small tax cut, so it's not absurd that a hypothetical doubling of the growth rate could result from a hypothetical 15% of GDP reduction in taxes. The hypothetical was just using larger numbers on multiple dimensions. You get a similar payback period if you use smaller numbers all around, e.g. a reduction in the overall tax rate from 23% to 21.5% resulting in an increase in the GDP growth rate from 2.5% to 3%. Moreover, the exact rate is difficult to calculate given limited data (and depends on changing factors in the economy), but the point is the existence of the effect. And it's not obvious that even quite long payback periods wouldn't be worth it, since the lower tax rate and the higher growth rate could then be sustained thereafter indefinitely.
- pyrale 2y ago
  > "major tax cuts" were actually very small [...] on the order of 1-3% of GDP 3% of the GDP in tax cuts is pretty enormous. > a hypothetical 15% of GDP reduction in taxes. For reference, total federal spending was 23% in 2022. Total government spending was 36% in 2023. So let's say you want to cut 15 of that 36%. That would mean cutting all of health care + all of pensions, or all of health care + all of education. Or defense + pensions + infrastructure. Good luck doing that.
  - AnthonyMouse 2y ago
    > 3% of the GDP in tax cuts is pretty enormous. It's a <10% reduction in total taxes. It's only enormous if the assumption is that taxes never really go down as a percent of GDP (even in the face of per capita real GDP growth), which has been the case in recent history, but that's kind of the issue. > So let's say you want to cut 15 of that 36%. That would mean cutting all of health care + all of pensions, or all of health care + all of education. Or defense + pensions + infrastructure. The obvious thing to do would be to increase the efficiency of each thing rather than cutting any particular thing entirely. Defense spending is full of notorious boondoggles and waste. US healthcare spending goes to a highly captured industry with a large amount of bureaucratic overhead and could be made significantly more efficient, e.g. if US healthcare spending per capita was on par with Canada then healthcare spending could be reduced by more than the identified amount percentage-wise. Social security, by contrast, isn't exactly "waste" but the program is extremely poorly tailored to its intended purpose of providing a baseline for the elderly, because it pays out higher benefits to people who made more money and can be correspondingly expected to have more savings and need it less. A far more efficient program would be to provide the same amount to every retiree. Enacting that change would be politically difficult, just like making the US healthcare system more efficient would be politically difficult, but the question here is not "how hard would it be to get the votes for this" but rather "if we actually did this, would we be better off"?

rstuart4133 2y ago

> This doesn't have to be an instantaneous effect for it to be real. For the effect to be real business has generate more growth with the money than the government spending the money does. In most cases private enterprise clearly is more efficient that the government in the long term. In other cases, like health, it's clear from the USA example that government can supply better services for cheaper, freeing resources to further fuel to capitalist engine. This is probably true for other stuff we traditionally get our governments to manage like roads, k12 education, and local power and water distribution. If you can lower taxes so much private enterprise takes these functions over, the end result would be the same as you see for USA health - GDP goes backwards rather than forwards. Then there is this reality: most of these tax reductions have been funded by government borrowing. The businesses could have borrowed those funds on the market. The net outcome is you are not reducing the level of government influence on the economy, you're just re-arranging the deck chairs, and doing so in a way that favours the business owners who now effectively get the funds interest free, with citizens (who are also their employees) paying it instead. Given that the House Republicans unveiled blueprint to extend $4.5 trillion in tax cuts and lift the debt ceiling and that their current major backers are these super rich business owners, it's hard not to be a little cynical. [0] https://apnews.com/article/house-republicans-budget-blueprint-trump-tax-cuts-ff2bddf31f4e7cb0928139072392a091 https://apnews.com/article/house-republicans-budget-blueprin...

AnthonyMouse 2y ago
> For the effect to be real business has generate more growth with the money than the government spending the money does. That is correct but it was also taken as a premise in the original claim and seems fairly plausible in general. In particular, government services would expect to have diminishing returns, so there are some threshold level which are worth the candle but as you exhaust the low-hanging fruit, further spending yields less public benefit than for the taxpayers to keep the rest of their money. > In other cases, like health, it's clear from the USA example that government can supply better services for cheaper, freeing resources to further fuel to capitalist engine. This isn't really the best example. The US healthcare system is highly dysfunctional in terms of costs, but basically all other countries have significantly lower costs regardless of whether their system is public or private, so that doesn't appear to be the distinguishing factor causing the dysfunction in the US. But there are things governments could be better suited for, e.g. because they involve pricing major externalities or large fixed investments with a diffuse public benefit. Hardly anybody is suggesting that there shouldn't be one. The question is, are there things the government is currently doing that aren't worth the candle? Because the cost of that compounds over time. > Then there is this reality: most of these tax reductions have been funded by government borrowing. The businesses could have borrowed those funds on the market. This is actually an interesting question of a similar nature, because the government will generally be paying a lower interest rate than the corporate bond rate, and causing the economy to pay less interest to capital on borrowed money is probably an advantage. In theory the interest could then be paid from the increased revenues resulting from a stronger economy, but whether this is worth it depends on the interest rate, which gets a lot more expensive when it isn't zero anymore. > doing so in a way that favours the business owners who now effectively get the funds interest free, with citizens (who are also their employees) paying it instead. The implication here is that the businesses would be the ones to receive the cuts but taxes would then be increased on the employees to pay the interest. There are other things that could be done than that. > Given that the House Republicans unveiled blueprint to extend $4.5 trillion in tax cuts and lift the debt ceiling and that their current major backers are these super rich business owners, it's hard not to be a little cynical. The cynicism is often warranted but there is also a lot of partisanship in the complaints. Saying "$4.5 trillion" is an obvious one; that's the sum total over a period of years rather than the difference in the annual budget and includes a lot of money that goes to W-2 employees rather than billionaires. Meanwhile if you actually want super rich business owners to have less money the biggest thing you can do isn't related to top tax rates (which they generally find ways to avoid regardless), it's to increase the competitiveness of the markets in which they're extracting all of that lucre. It's better to make them give the money to the consumer as lower prices than try to hope the government can both take it from them and then not have it get lost in the pockets of some government official's cronies. But neither of the parties has historically been good at that, which is why we're in a bit of a mess.

pyrale 2y ago

That person speaks about the money not taxed being used for taxable economic activity on the same year, as opposed to that same money being spent on government programs, that generate less taxable revenue (e.g. because while paying contractors will generate taxable revenue, hiring a public servant to do the same job won't). Your reasoning is that the money spent by private people can also be investment, which will increase future gdp growth. However, you don't explain why government spending couldn't increase future gdp growth. Obvious counter-examples being money spent in schools, public research programs, etc.

AnthonyMouse 2y ago
The comment claims that it isn't possible for lower taxes to increase tax revenues. It's possible whenever the taxpayers would have used the money more productively than the government. Which may not always be the case, but it's certainly possible for it to be the case, and indeed is not an implausible default assumption because governments generally aren't subject to competitive pressure and consequently tend to allocate resources in ways susceptible to inefficiency, waste and corruption.