Tax Policy: Cutting tax rates frees up capital to be deployed more productively in the private sector
The supply-side proposition has always been that it’s the growth of the economy, not tax rates, that determines federal revenues. If you look through history, you’ll see that federal revenues are usually right around 18 percent of GDP regardless of what the tax rates are, so the best policies the government can set are the ones most friendly to growth.
This is what will get liberals cackling in derision. And it’s not just them. Every Ferris Bueller fan knows George H.W. Bush called supply-side Something-D-O-O economics (“Voodoo Economics,” said like Ben Stein, thank you very much), because he joined the rest of the Beltway crowd in dismissing the idea that raising or lowering tax rates would ever do anything but raise or lower tax revenues commensurately.
It seems intuitive to you and me that changing tax rates and tax incentives would affect people’s economic behavior, but don’t try to convince the left and their media friends of that.
Then again, you could actually look at the most recent results. As Steve Moore writes in today’s Wall Street Journal, the Trump tax cut is paying for itself. By a lot:
Compare the August 2018 economic forecast from the Congressional Budget Office with the one from June 2017, before the tax cuts passed, and we discover some very good news. The much higher than expected economic growth in the wake of the Trump tax cut means that U.S. gross domestic product will be higher than expected every year over the next decade.
Even if we assume a reversion to the pre-Trump 1.9% growth path, the ratchet up in GDP this year translates into $179 billion in unexpected output this year, $465 billion next year, $654 billion in 2020, and so on. This magic of compounding yields more than $6 trillion additional GDP over the decade thanks to the faster growth already achieved.
The federal government is expected to capture a bit more than 18% of that extra output in tax revenue—about $1.1 trillion over the 10-year window. That’s well above the $400 billion to $500 billion expected revenue loss from the corporate tax-rate cut.
Corporate tax revenues are down this year, but receipts from nearly every other tax source are rising at the federal and state levels. The higher growth this year alone will give states and cities almost $20 billion in windfall revenue. No surprise then that many states are reporting “unexpected” gains in tax collections this year and will have budget surpluses.
This is the part the left fails to understand, willfully, I suspect.
Cutting tax rates frees up capital to be deployed more productively in the private sector. You might collect less from corporate taxes, but the capital those corporations didn’t pay to the government will be invested in...
