As arguments over tax increases versus spending cuts continue, Veronique de Rugy (NRO – The Corner) refers to a paper by Christina and David Romer (the former was Chair of President Obama’s Council of Economic Advisors for over a year and a half) on the effects of tax increases on GDP. The National Bureau of Economic Research summary of the paper has this eye-popper (emphaisis in original):
Tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.
Within the paper itself, the range shrinks to 2.5-2.75%.
That is a very significant. When combined with my quick-and-dirty regression from yesterday. That means an exogenous tax increase designed to raise revenue by 1% of GDP will reduce GDP so much that the actual change to revenue ranges from an increase of 0.04% of GDP to a decrease of 0.05% of GDP.
Conversely, a tax cut of 1% of GDP would raise GDP to the point where Washington’s revenue would at worst fall 0.04% of GDP or at best rise 0.05% of GDP. In other words, tax hikes don’t help and tax cuts really do pay for themselves.
The trick is, of course, to make sure the tax cut doesn’t have to pay for new spending on top of the tax reduction. The only time a recent tax cut did not have to multi-task (the 1997 tax cuts) led to the only four budget surpluses since 1970.
We need to keep this in mind as the calls for tax increases grow louder.
Cross-posted to the right-wing liberal
Filed under: Economics, National Politics, Spending, Taxes
D.J.,
This has been proven over and over throughout the history of the United States, unfortunately the last Democrat that knew this and accepted it was John Kennedy.
One of the biggest problems we must overcome is the view that every dollar made somehow belongs to the Federal Government, and that they get to decide how much each of us gets to keep.
Income is personal property, and should be protected under the Constitution as such. The Federal government is entitled to none of our income, without the express approval of the People.
What the People are saying right now is you have enough; you are not getting any more until you quit spending.