Thoughts on Tax Cuts and Supply Side Economics

by | Mar 28, 2003

The Senate’s surprise vote Tuesday to reduce the value of President Bush’s proposed tax-cuts by more than half has been played in the press as a major setback for the President’s agenda. But the way I see it, it’s actually great news: a tax-cut that was assumed to have zero chance just a month ago […]

The Senate’s surprise vote Tuesday to reduce the value of President Bush’s proposed tax-cuts by more than half has been played in the press as a major setback for the President’s agenda. But the way I see it, it’s actually great news: a tax-cut that was assumed to have zero chance just a month ago now has a floor under it of $350 billion.

So now the real debate begins: how much more than $350 billion will the tax-cut be? And exactly which of Bush’s many proposed cuts will survive? The debate won’t just be between Democrats and Republicans, either. The President’s own party is deeply divided at a fundamental conceptual level about the dynamics of budget cuts, tax cuts, and deficits, and the trade-offs between them.

At the center of the debate will be the extent to which the proposed tax-cuts will contribute to budget deficits. Will they be a deadweight loss to federal revenues, or will the cuts stimulate enough economic growth to partially or wholly offset any revenue losses? Tuesday the Congressional Budget Office published an analysis of the President’s budget and tax proposals that — for the first time — sought to answer that question in just those terms.

Some statements from the Bush administration have been very bold about their answer to that question. The President said in a speech earlier this year that “growth will bring the added benefit of higher revenues for the government.” Vice President Cheney said

Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at www.poorandstupid.com. He is also a contributing writer to SmartMoney.com.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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