| Business Cycles: GDP and Revenues Correlating Tax Rates with Revenue Reagan TaxCuts: The Facts Bush Tax Cuts: The Facts |
Historical Tax Rates The Laffer Curve In Conclusion Further Reading |
The argument that tax cuts create or increase revenue is an old myth that simply refuses to go away. The logic behind this argument is that cutting taxes will stimulate spending (since investors now are now encouraged through reduced tax rates) that will result in GDP growth. This growth in GDP will result in increased tax revenues so significant that they will more than offset the drop in tax revenues that result from a lowered tax rate. The inverse to this is that increased taxes lower tax revenue by discouraging investment, which in turn lowers tax revenues so drastically, that they offset the added increase coming from the tax rate increase. One of the reasons Republicans and other self-ascribed fiscal conservatives are able to get away with this is, is the superficially plausible argument that the Reagan and/or Bush tax cuts grew the economy and created revenue. To understand the fallacy of these arguments, it is necessary to understand economic growth during business cycles and over a long period of time, and how this affects tax revenues.