Not all Tax Cuts are Created Equal

WH Bernstein

by WH Bernstein, reposted from Facebook, 8/22/2024- On my mind: Tax cuts.

An eminent friend and sensible man has asked me about Trump's tax cuts and wouldn't they pay for themselves or something.

Not all tax cuts are created equal.  The beauty of Reagan's philosophy was that he actually understood how this worked. If you cut the tax on, say, alcohol, manufacturers will tend to cut prices or use the extra money to upgrade equipment, improve salaries etc. But the amount of extra economic activity generated will not make up for the loss of revenue to the government. Similarly, if you increase the childcare credit, which both Harris and JD Vance are proposing, people will have a little more money but their extra spending will not offset the revenue loss.

Tax cuts work when the tax is on some kind of production.  Thus, capital gains tax cuts produce more revenue (and have done so every time) because the lower rates encourage people to sell existing assets and reinvest the money in other places. Even Obama understood this (see video in comments). Similarly, cuts in marginal tax rates encourage people to work extra, because they get to keep more of the income from that extra work.  

Imagine an architect charging $100,000 for a commission that can do 14 jobs a year.  If on the last two jobs he's only going to make $40,000 because his marginal tax rate is 60% then he'll likely just skip it.  Lower the marginal rate to 40% and might do those jobs.  And the construction, blueprints, transportation, etc. etc. that his work generates will mean more money being made in the economy which means more tax revenue.

Cutting something like Social Security taxes encourages no one to work or produce more.  "Putting money in people's hands" is the fallacious argument made, but we have lots of experience with this and the actual outcome is no more economic activity results.

The Trumpistas have forgotten (willfully in some cases) this distinction.  Turmp's proposals to reduce some taxes are as idiotic as what the Democrats propose, mere pandering to groups he hopes will vote for him.

Bill Bernstein, formerly of Nashville where he was owner of Eastside Gun Shop, now lives in Brunswick, Georgia. He is a scholar with a BA degree from Vanderbilt University and degrees in Classics from Corpus Christi College, Oxford, UNC-Chapel Hill, and University of Pennsylvania.

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