Now, when on the other hand taxes are lowered, this provides taxpayers with more money, and a lot of that gets spent, which revs up the economy ..

So the government doesn't spend the money it collects? How does $1 spent by a consumer grow the economy more than $1 spent by the government?

Also, would you admit that borrowing money to pay for tax cuts doesn't decrease government spending? If so, then isn't the borrowing more of a catalyst than the tax cuts in terms of growing the economy?

How does $1 spent by a consumer grow the economy more than $1 spent by the government?

Government spending doesn't go into the private sector (business) with the anywhere near the proportion as consumer or industrial spending.

Most public spending tends to pay for public ventures (i.e. non-taxable ones). Allocating millions of dollars for a "bridge to nowhere" in Alaska (or other such pork spending) doesn't equate to dollars spent on, say, consumer or durable goods. This is where the tax revenue comes from. You don't tax a public works project or the activities of a government agency.

Thanks for the response.

Government spending doesn't go into the private sector (business) with the anywhere near the proportion as consumer or industrial spending.

The government doesn't actually build bridges and aircraft carriers. Instead it pays private contractors to build such things. Those private contractors are taxable entities. I am not sure how you can argue that government spending isn't taxable. Even grant money becomes taxable once the grant recipient spends it on rent, office supplies or a slurpee.

A dollar spent by a private citizen or a private business will tend to be more effectively spent than one by the government simply because the private sector is incented to be more efficient (risk vs reward).

The gov't and the private sector shouldn't be spending money on the same things therefore it doesn't matter which one can spend the money better. Increased efficiency might be a good argument for privitization but I don't see what it has to do with increasing income tax revenue.

It's not so much what they're both spending on but rather how they spend it.

Government bureaucrats are not very demanding and are usually constrained as to what bids they can accept from private contractors.

Consumers are more demanding and drives producers of consumer goods to develop technological advances, innovation and better products - which tends to lead to increased revenues and reduced costs. Hence, a bigger bottom line. Which is taxed. The higher the profits, the higher the tax revenue.

Thanks again for the response.

It's not so much what they're both spending on but rather how they spend it.

But in the last round of tax cuts there were no offsetting spending cuts so it isn't like we took money from the government and gave it to the private sector to spend more wisely. Instead the government borrowed the money and spent the exact same amount as they did before. Tax cuts didn't result in better spending just more spending. That is why I don't buy that tax cuts pay for themselves because we have never seen any corresponding spending cuts. One might be able to argue that deficit spending pays for itself but one can't know that until the money has already been paid back.

Government spending is way out of control, true. It seems that regardless of political affiliation, the Congress has proven it can show no fiscal restraint and this is regrettable.

And why the President has been complicit in this spending has many a Republican scratching their heads. Perhaps it's the "compassionate" part of Compassionate Conservatism that he advocates.

You're point is taken in that tax cuts don't pay for themselves when you turn around and spend like drunken sailors.

But my point is not that "tax cuts pay for themselves" but rather tax cuts lead to higher tax receipts. If you look at the deficit since 2003 it has decreased much faster than even the Administration had targeted - despite all the over spending.

Spending cuts weren't needed to offset tax cuts. Rather, fiscal responsibility is necessary in order to allow the increased tax revenues to be the most effective. If Congress had shown some spending restraint since the tax cuts were put into place, there would be no deficit and no need to borrow money to pay for wasteful pork. In an ideal world the tax revenue would pay for only what was necessary and there would be a surplus (which should be refunded to tax payers seeing as it's their hard-earned money).

The principal itself, however, that lower tax rates lead to higher tax receipts is true irrespective of spending. The spending just undoes a lot of the good.

There is also the famous Laffer Curve, whose truth is self-evident. 0% taxation yields 0% revenue. 100% taxation also yields 0% revenue --because there is no incentive to work.

I will admit that the latter part is a bit of an academic simplication, because it underestimates the government's ability -- and will -- to use force. For example, wage and price controls generally worked in 1930s Germany under the Nazis, because those who cheated or shirked were sent to the camps.

But Arthur Laffer is essentially correct -- 100% taxation is highly ineffective at producing revenue. The key is where does the curve peak? The effect of the Kennedy tax cuts, the Reagan tax cuts, and the W tax cuts was, in each case, to bring in more revenue, because the economy responded and more business was done. I'd siggest to Blue Neponset, who seems to be arguing from a position of invincible agnosticism on the subject that when all three Presidents believed taxes were too high and then proceeded to cut those taxes, revenue subesquently increased. If the Laffer Curve proposition is not true, one might reasonably expect it to have failed in at least one of those times to produce more revenue, although three is an admittedly small series -- I might flip a coin three times and have it come up heads three times in a row.

Nevertheless, I'd suggest that even if tax cuts are not the underlying cause of the revenue boom, they certainly seem to be lucky. If the voodoo economics works, is it really voodoo?

If so, let me be the first to offer a chicken from my tax rebate check in thanks.

The principal itself, however, that lower tax rates lead to higher tax receipts is true irrespective of spending. The spending just undoes a lot of the good.

I don't know if I am repeating myself yet (sorry if I am), but the point I am trying to make is that we will never know if tax cuts lead to higher tax receipts unless the government pays for tax cuts through reduced government spending. If they pay for tax cuts by borrowing money then that may be the catalyst for increasing tax revenues.

I disagree, Blue Neponset.

Economics is at is core, the study of the allocation of goods and services in the face of relative scarcity. The emperical evidence is clear. Tax revenue increases in when aggregate demand is stimulated. And that occurs when either government spending increaes or, when taxes are decreased.

The idea that we cannot determine if tax cuts stimulate aggregate demand (and thereby increase tax receipts) flies in the face of history.

In 1978, the Capital Gains tax was decreased, and that stimulated the growth of venture capital - money available for investors to provide seed money for high risk / return start up companies like those in southern California.

In 1981-83, the Reagan era tax cuts were enacted, which resulted in an economic expansion which lasted until 1990. A similar effect occured 2002 when the Bush tax cuts started to take effect. Government spending rose as well (both defense and non defense) however, the economy grew overall, not just the defense related industries because individuals were incented to take work harder, and take more risks.

Correspondingly, when taxes are increased, revenue falls. A good example of this was the 'luxury tax' of 1990 which boosted taxes on yachts, and nearly crippled a industry.

You seem to be stuck on this whole "paying for tax cuts" concept. You don't "pay" for tax cuts. You implement them, the economy responds (chiefly through the private sector economy), higher profits result and in the end - the government collects higher tax receipts.

I really don't know how to put it more simply.

Spending is a separate matter. Whether you spend too little or too much, the result is measured by a deficit or surplus. But whether you end up with a deficit or surplus, the fact remains that tax cuts have the net effect of strengthening the economy.

The amount of tax revenue - measured in whole dollars - goes UP.

But I would go back to your earlier point that government spending has the same effect on the economy as private spending.

This is erroneous. As you also point out, higher government spending requires borrowing to make up the shortfall. So by that logic, government spending is detrimental to the economy because it increases money cost and undermines it's strength.

But, again, regardless of spending the principle that Drummond outlines has been proven in the 1960's, the 1980's and over the past four years.

But the "paying for tax cuts" idea takes us off on a tangent that has nothing to do with this basic economic assumption. That's really it.

If you're trying to make an argument that the principle isn't sound, you need to address the basic assumptions (lower taxes provides incentive for higher profits). The effect of government spending on the economy is a separate topic.

If you're trying to make an argument that the principle isn't sound, you need to address the basic assumptions (lower taxes provides incentive for higher profits). The effect of government spending on the economy is a separate topic.

I am not arguing about the laffer curve or supply side economics. I am arguing that the effect of government spending on the economy is being ignored by those who claim tax cuts pay for themselves.

You seem to be stuck on this whole "paying for tax cuts" concept. You don't "pay" for tax cuts.

Sure you do. If you have to replace tax revenue lost via a tax cut then you either have to increase other types of receipts or you have to decrease spending. That is what I mean by paying for tax cuts. Are you claiming the US economy reacts to a tax cut instantly? If not, then you have to pay for the tax cut somehow.

Again, the whole post is about supply-side economics and the fact that it works.

From your first comment: "How does $1 spent by a consumer grow the economy more than $1 spent by the government?"

I answered that question because it was relevant to the post.

Also from your first comment: "would you admit that borrowing money to pay for tax cuts doesn't decrease government spending? If so, then isn't the borrowing more of a catalyst than the tax cuts in terms of growing the economy?"

Now you're off topic because you have a separate point to make. That point - that overspending and borrowing to pay for the overspending is unwise - was acknowledged as a valid point in my third comment. But that point doesn't refute the premise of the post.

The remainder of this comment thread has been a back and forth over the detriment of government spending on the economy. But since it has nothing to do with the validity of supply-side economics as a concept, I'll respectfully end it here as it's going nowhere.

Blue Neponset,

Try researching the 'multiplier effect' after you've studied macro economic theory.

kmr,

Try not to be an [expletive deleted].