Tax Analysts Blog

Tax Cuts Kill Jobs

Posted on Sep 30, 2010

In the mainstream media and on Capitol Hill it is accepted as gospel that tax cuts are always good for the economy. (That's why the title to this blog post is so grating.) But it simply ain't so. In a May 2003 report requested by Republicans, the Joint Committee on Taxation estimated that the long-term effect of proposed tax cuts on the economy were likely to be negative. On Tuesday CBO Director Douglas Elmendorf made the same point about extending the Bush tax cuts to the Senate Budget Committee. Elmendorf stressed that, as always, there was a lot of uncertainty surrounding economic estimates. With this caveat in place, he reported that his staff's best assessment was twofold. In the short term (that is, in 2011 and 2012) tax cuts would provide short term stimulus. But that over the long run (that is, by 2020) the supply-side effects take over and the supply side effects were negative.

Why? Because the expansionary effect of lower marginal tax rates on capital and labor would be more than offset by the negative crowding out effects of increased government borrowing.

There is little doubt that the same CBO models that produced this result would show a strong positive effect of a tax cut if the tax cut were financed by spending cuts instead of larger deficits. But these days those types of tax cuts are pretty rare.

Republicans and Tea Partiers want tax cuts and spending cuts. The first is easy and the second is hard. CBO is telling the conservatives who care about growth that tax cuts without spending cuts is putting the cart before the horse.

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