The Impact of Tax Cuts

This economic theory is what George H.W. Bush called “voodoo economics.” We called it “supply-side spin” when we wrote about Republican presidential contender John McCain’s claim that President George W. Bush’s tax cuts had increased federal revenues. We found that a slew of government economists – from the Congressional Budget Office, the Treasury Department, the Joint Committee on Taxation and the White House’s Council of Economic Advisers – all disagreed with that theory, saying that tax cuts may spur economic growth but they lead to revenues that are lower than they would have been if the cuts hadn’t been enacted. 

 

The supply-side theory that tax-cut proponents often espouse was demonstrated by the Laffer curve, named for economist Arthur B. Laffer. The curve suggests that a higher tax rate can generate just as much revenue as a lower rate. But most economists are not Laffer-curve purists. Instead, while they may believe in the power of tax cuts to create an economic boost, they don’t say that growth is enough to completely make up for lost revenue. For example, N. Gregory Mankiw, former chair of the current President Bush’s Council of Economic Advisers, calculated that the growth spurred by capital gains tax cuts pays for about half of lost revenue over a number of years and that payroll tax cuts generate enough growth to pay for about 17 percent of what is lost.

 

Corporate income taxes, however, may be an exception. There is some evidence that cutting the corporate tax rate can produce more revenue than was projected under the higher rate in the special case of multinational corporations, which can move their money and operations around to take advantage of lower taxes in certain countries. Economists with the pro-business American Enterprise Institute came to that conclusion in a study released in July 2007. They found that lower corporate rates attract enough growth in corporate income to produce higher government revenues. However, one of the authors, Kevin A. Hassett, told FactCheck.org that small countries, such as Ireland, had the most success and that "it may or may not be correct" to apply the study’s results to the United States.