Tax Cuts Are Not Self-Financing

Economist Charles Wheelan’s column in Yahoo! Finance tells us why cutting taxes and increasing spending is bad government policy.

Source: Debunking One of the Worst Ideas in Economics: The Naked Economist – Yahoo! Finance

Neither the Reagan nor the George W. Bush tax cuts were "self-financing," as the Laffer disciples like to argue. …the current Bush Administration’s top economist, Gregory Mankiw, estimated that decreasing taxes on labor would generate enough growth to recoup only about 17 cents for each lost dollar; a tax cut on capital is better, paying for more than half of itself. Still, the bottom line from the Bush Administration itself is that tax cuts reduce Uncle Sam’s take.

So why does Laffer’s sketch on Dick Cheney’s cocktail napkin rank near the top of my list of bad economic ideas? Because, when applied to the U.S., it’s intellectually dishonest. The Laffer Curve offers the false promise that we can cut taxes without making any sacrifice on the spending side, and that’s simply not true. It’s the economic equivalent of arguing that you can lose weight by eating more.

Let me be perfectly clear: I’m not arguing that tax cuts are bad. I’m simply pointing out that we can’t pretend that tax cuts won’t require reductions on the spending side to balance the budget. In fact, you can disregard every other argument in this column and think about one thing: If Laffer were right, lower taxes would never require any spending sacrifice. We could pay a mere one percent of our income in taxes and still fund all of our government spending — and maybe more! Do you think that’s really possible?

This column should give you a hint of why economics is called the dismal science — it’s all about tradeoffs. We’re the ones telling you that if you get more of something, you probably have to get less of something else.

Whether it’s tax policy or dieting, you can’t have your cake and lose weight, too, which is why America currently has huge deficits and a lot of fat people.