Tuesday, December 30, 2008

Tax Cuts Do NOT Pay for Themselves.

No credible economist believes tax cuts generate so much economic growth that tax revenues rise above what they would have been in the absence of the tax cut. Even conservative Republican economists understand this. Greg Mankiw, the Chairman of President George W. Bush's Council of Economic Advisers from 2003 to 2005, ridicules people who make such claims. In his best-selling textbook, Principles of Economics, Mankiw refers to people who say tax cuts increase revenues as "charlatans and cranks."
"Fad diets are popular because they promise amazing results wit minimal effort. Many people want to lose weight but are not eager to pay the price of eating fewer calories and exercising more regularly. These people are convinced all too easily by the reassuring words of some self-proclaimed expert selling a miraculous product. The want to believe that this new, easy-to-follow diet really will work.

"Fad economics is also popular, for much the same reason. Anyone can adopt the title 'economist' and claim discovery of some easy fix to the economy's troubles. These fads often tempt politicians, who are eager to find easy and novel solutions to hard and persistent problems. Some fads come from charlatans who use crazy theories to gain the limelight and promote their own interets. Others come from cranks who believe that their theories really are true.

"An example of fad economics occurred in 1980, when a small group of economists advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would rise by so much, they claimed, that tax revenue would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as far too optimistic. Lower tax rates might encourage people to work harder, and this extra effort would offset the direct effects of lower tax rates to some extent. But there was no credible evidence that work effort would rise by enough to cause tax revenues to rise in the face of lower tax rates. George Bush, also a presidential candidate in 1980, agreed with most of the professional economists: He called this idea 'voodoo economics.' Nonetheless, the argument was appealing to Reagan, and it shaped the 1980 presidential campaign and the economic policies of the 1980s.

"People on fad diets put their health at risk but rarely achieve the permanent weight loss they desire. Similarly, when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate. After Reagan's election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenue to rise. Instead, tax revenue fell, as most economists predicted it would, and the U.S. federal government began a long period of deficit spending, leading to the largest peacetime increase in the government debt in history.

"Fads can make the experts seem less united than they actually are. It would be wrong to conclude that professional nutritionists are in disarray simply because fad diets are so popular. In fact, nutritionists have agreed on the basics of weight loss - exercise and a balanced low-fat diet - for many years. Similarly, when the economics profession appears in disarray, you should ask whether the disagreement is real or manufactured. It may be that some snake-oil salesman is trying to sell a miracle cure for what ails the economy."
-- N. Gregory Mankiw. Principles of Economics. Fort Worth: The Dryden Press, 1997, pp. 29-30.

Mankiw served as the chairman of President Bush's Council of Economic Advisers from 2003 to 2005.

Mankiws also has a July 2, 2007 blog entry entitled On Charlatans and Cranks.

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