Tuesday, December 7, 2010


During the recent discussions on the Bush era tax cuts one little thing keeps bothering me. Actually, it's two things.

First, it's absolute Republican dogma that all tax cuts increase revenue flowing into the government doing the taxing. This is, of course, based upon our old friend the Laffer Curve. You remember, right. As tax rates go up one reaches a point at which peoples economic behavior changes and they start to work less, thus lowering tax revenues. 
As you can see, the government gets zero revenue from a 0% tax rate and, according to the theory behind the curve, zero revenue when the tax rate reaches 100%. Now, the problem with this nice simple formulation is that the curve doesn't work to predict anything. See, there's no way to figure out where the actual tipping point (labeled Equilibrium Point on the chart) lands. Are we now at the point that any increase in tax rates means less revenue or are we on the left hand side where increased rates equal increased revenue? There's no good way to know. According to the Republicans, of course, we're always on the right hand side.
The second bit of dogma is the Republican concept of "Starve the Beast." The easy definition:
"Starving the beast" is a fiscal-political strategy of some American conservatives to use budget deficits via tax cuts to force future reductions in the size of government.
 We hear this a lot when the conversation turns to those nasty entitlement programs. If the Republicans could just lower taxes that would take care of all our problems because then the Democrats wouldn't have the money to fund their Socialist wealth redistribution programs and so on.

Okay boys and girls, we've learned two political terms. So, would someone please explain to me how they can both be right? How the heck can cutting taxes both increase revenues and starve the beast at the same time?  One or the other (or both?) of these must be wrong. Or maybe I just need to take a nap until my head stops hurting.

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