Tuesday, April 26, 2011

Making people put their money where their mouths are on taxation

One of the most irritating right-wing/supply-side canards is 'tax cuts pay for themselves', i.e., the idea that reducing (ordinary, non-extreme, non-confiscatory) income-tax rates increases revenues.

I propose the following technique to make people ask themselves whether they really believe this: pick some sector of government spending valued by the proponents, say, defense or highway construction or police or farm subsidies or.., and designate some appropriate slice of revenues - e.g., x% of everything paid (differentially) at the highest rates and y% of everything paid (differentially) at the second-highest marginal rates - as its dedicated funds. Any changes in those rates then directly affect the budget for that sector.

Let's assume that we put in a 3-4 year moving average 'smoothing factor', lagged if needs be (say if it's claimed that behaviors won't change overnight in response to small incentive changes). I'm a reasonable fellow! Eventually, however, money must be put where the mouth was: if you really believe that tax cuts pay for themselves then you should have no hesitation whatsoever cutting the marginal income tax rates that fund, e.g., the military, as a way of boosting military budgets in the medium-to-long-term.

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