I teach tutorials in Economics 101. Yesterday an international student asked me to explain why “one of the American political parties” thinks cutting tax rates will increase fiscal revenues. I explained that their theory is that lowering taxes will encourage people to work, spend, and invest more; that this would spur economic growth; and that even a lower tax rate on this higher GDP could actually generate higher revenues.<\/p>\n
“Oh, that’s interesting. Is it true?” was his reply.<\/p>\n
I thought about it for a second. I briefly considered the implications of answering a politically-charged question. I worried a little that this was a student whose interest in economics was piqued, and that I ran the risk of blunting that interest. After contemplating whether I should answer whether it was theoretically possible or empirically verifiable, I gave him the most honest answer I could: “No.”<\/p>\n
The consensus among economists is that although this “bigger cake” idea has some truth to it, lowering taxes does not increase the cake anywhere near enough to make a significant difference. Harald Uhlig<\/a> thinks higher tax rates could increase American income tax revenue by 30%; the Congressional Budget Office<\/a> thinks that although lowering tax rates would lead to more economic activity, the revenue generated by these new activities would only be a quarter of the revenue lost in the initial tax cut; and even Greg Mankiw<\/a>, chairman of the Council of Economic Advisers to President Bush (the second), thinks this thesis is a bit silly.<\/p>\n","protected":false},"excerpt":{"rendered":" I teach tutorials in Economics 101. Yesterday an international student asked me to explain why “one of the American political parties” thinks cutting tax rates will increase fiscal revenues. I explained that their theory is…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9,11],"tags":[],"class_list":["post-797","post","type-post","status-publish","format-standard","hentry","category-economics","category-teaching"],"_links":{"self":[{"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/posts\/797","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/comments?post=797"}],"version-history":[{"count":0,"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/posts\/797\/revisions"}],"wp:attachment":[{"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/media?parent=797"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/categories?post=797"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hargaden.com\/enda\/wp-json\/wp\/v2\/tags?post=797"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}