Friday, April 8, 2011

Can Tax Cuts Magically Increase Revenue

Since Reagan, Republicans have been operating under the illusion that tax cuts somehow magically increase government revenue. As an example here is a 2001 article by the Heritage Foundation erroneously predicting that the Bush tax cuts would pay off the entire national debt by 2011. It is worth noting that the idea of tax cuts increasing revenue can actually work in certain circumstances as shown is this simplified graph of the Laffer Curve.

Note on the graph, if we are at point B and reduce taxes, revenue would go up while if we are at point A and reduce taxes, revenue would drop. The problem is that Republicans ALWAYS think we are at point B even when we are clearly at point A.

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