James is a graduate student at the Goldman School of Public Policy.
Every so often, you’ll be arguing with your uncle over Thanksgiving dinner, and he’ll say something crazy like that cutting taxes actually brings in more revenue.
Mitt Romney said it just the other day in a Des Moines Register interview:
“He gave a spirited rebuttal to Obama’s charges, saying he would cut the federal income tax rates by 20 percent, reduce the corporate rate from 35 percent to 25 percent, simplify the tax code, close loopholes, get rid of some deductions – and that the adrenaline injected into the economy from these changes will bring in enough revenue that federal debt wouldn’t deepen.”
Like most arguments over Thanksgiving dinner and in Facebook comment threads, it’s all hypothesis and no test.
The first-years in Dan Acland’s Econ class saw it tested. As Acland put it, this isn’t a theoretical question, it’s an empirical question. Using known wage elasticities, he did the math and figured that indeed, the government would bring in more revenue by lowering tax rates — if the tax rate were 70 percent or higher.
Of course, this is Berkeley, so we have more than one prof doing the work. Emmanuel Saez over in Economics puts the top rate at 57 percent if you’re sticking with just supply-side models, and up in the 80 percent range when you consider other behaviors.
And lest you think it’s just Berkeley lefties saying it, check out this report from the CBO when it was headed by Douglas Holtz-Eakin, a George W. Bush appointee, who says that at best, the increased income from a tax cut would equal one-third of the straight revenue loss. So you can say a $3 billion tax cut might — MIGHT — only be a $2 trillion tax cut in the end.
Tax cuts decrease tax revenue. It’s math.