In re: Sen. Mitch McConnell’s recent remarks on tax cuts, Kevin D. Williamson wrote an excellent piece that summarized what we know about the impact of tax cuts on revenues:
There is considerable debate among economists and federal legume-quantifiers about how large supply-side revenue effects are. The Congressional Budget Office did a study in 2005 of the effects of a theoretical 10 percent cut in income-tax rates. It ran a couple of different versions of the study, under different sets of economic assumptions. The conclusion the CBO came to was that the growth effects of such a tax cut could be expected to offset between 1 percent and 22 percent of the revenue loss in the first five years. In the second five years, the CBO calculated, feedback effects of tax-rate reductions might actually add 5 percent to the revenue loss — or offset as much as 32 percent of it. That’s a big deal, and something that conservative budget engineers should keep in mind. But the question of whether the CBO accounts for tax cuts at 100 cents on the dollar, 99 cents on the dollar, or 68 cents on the dollar is hardly the stuff that a broad-based political movement is going to put at the center of its campaigns. Federal spending, on the other hand, is a national crisis.
When the Senate Minority Leader says that
“That there’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject.”
one wonders what exactly he means. His statement runs directly counter to the Kevin’s able summary of the debate so far. If cutting taxes always led to revenue increases, there would be little reason to, for example, limit compensation in the public sector. I assume that Sen. McConnell recognizes that there is some point at which tax cuts will lead to decreased revenues. But that’s not clear from his statement.
And this kind of thinking inclines us to increase spending to new heights. Why? If the public is convinced that we can afford high levels of spending by cutting taxes and contributing to the vibrancy of the economy, the case for restraining the growth of public spending collapses. While a large majority of voters can be persuaded that we need to cut wasteful spending because it has to be paid for through higher taxes, a large majority of voters can’t be persuaded that we need to cut wasteful spending because we don’t like social workers or public school teachers or free roads and much else besides.
There is a deep illogic here, and it does more damage to conservative efforts to create a more efficient and sustainable public sector than Sen. McConnell seems to appreciate.