Bottom line: Cuts, in both taxes and spending, are among the primary means in which America can regain prosperity. Tax cuts DO lead to economic growth...
AEI: One thing policymakers and journalists — and voters — should be sure of is that cutting tax rates can be a pretty effective way to boost economic growth. And raising tax rates hurts economic growth. I could point to numerous studies and historical examples. But here’s just one, a study from Christina Romer, President Obama’s former top economist: ”Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] tax cuts have very large and persistent positive output effects.”
Now some folks, mostly found on the left, would like to believe this economic reality isn’t so. They would like to believe that America can pay for the coming deluge of entitlement spending by raising taxes on the rich with no impact on economic growth.
Example: this opinion piece from liberal New York Times columnist David Leonhardt, which suggests tax cuts don’t lead to higher economic growth. Basically, his whole argument is one of simple causality. There have been times when high taxes rates and high economic growth have peacefully coexisted. In fact, growth has been higher in the U.S. when taxes have been higher. Leonhardt seems to think this conclusion from a Congressional Research Service is an argument ender. But this a very old, very tired argument.
Taxes and tax rates aren’t the only things that matter to economic growth, of course. And every tax cut won’t pay for itself. Moreover, government needs enough revenue to pay for defense, basic research, and a safety net. But taxes are pretty important. And pro-growth tax reform...could boost employment and income growth and give government more revenue to pay down debt.
See, governments have it backwards. It's lowering taxes that increases revenue, not raising them...
SeekingAlpha: It seems that just about every G20 government believes that the solution to their chronic levels of public debt is to raise taxes. The problem however, is that history clearly shows that this is precisely the wrong thing to do. Raising taxes actually reduces government revenue, while lowering taxes increases it.
Although it sounds counterintuitive, the way out of our global debt crisis (or at least part of the solution), is to reduce taxes. History clearly shows that reducing taxes actually increases government tax revenue.
Higher taxes reduce the spending power of individuals which reduces demand for products. This, in turn, reduces the profitability of businesses. Higher taxes also directly impact the ability of a business to expand. Therefore higher taxes reduce economic activity and pull money away from the productive private sector.
Sadly it seems that our political leaders have not learnt the lessons of economic history and are instead blithely repeating them. Rather than lowering taxes - something which would enable them to reduce their deficits more quickly - they are raising taxes which reduces tax receipts and slows economic output.
The harmful effects of these tax increases can be seen most vividly in nations such as Greece and Spain. However other nations such as France, Italy and the U.S. are also following this path, making a swift resolution to the ongoing sovereign debt crisis all the more unlikely.
Also, besides tax cuts, budget cuts are better for the economy than tax hikes...
IBD: Let's be clear: This body of evidence doesn't mean that cutting government spending always leads to economic booms. Rather, it shows that spending cuts are much less costly for the economy than tax hikes and that a carefully designed deficit-reduction plan, based on spending cuts and pro-growth policies, may completely eliminate the output loss that you'd expect from such cuts. Tax-based deficit reduction, by contrast, is always recessionary.
A deficit-reduction program of carefully designed spending cuts can reduce debt without killing growth, so there's no need to be so protective even of today's weak economies.
