The fine folks at the Center on Budget and Policy Priorities have prepared a great new report on the demonstrably stupid argument that tax cuts pay for themselves.
What apparently set the CBPP off was House Budget Committee Chairman Jim Nussle (R-Iowa), announcing last week, “Tax cuts don’t need to be paid for [with offsets] — they pay for themselves.” The CBPP doesn’t seem to think much of this argument.
At the heart of Chairman Nussle’s response is the belief that tax cuts generate so much economic growth that they pay for themselves — that is, that the economy expands so much as a result of tax cuts that it produces the same level of revenue as the economy would produce without the tax cuts. This belief is one of the most powerful and enduring myths in public finance. No reputable economist — liberal or conservative — has ever shown that tax cuts pay for themselves. The assertion that tax cuts pay for themselves is little more than wishful thinking, and is rejected by virtually every serious economist and budget analyst.
Naturally, the CBPP goes into detail, as it always does, to explain why this nonsense does not, and will not, work.
But just to add fuel to the fire, I thought I’d mention that there’s another high-profile economist who has not only discounted the notion of tax cuts paying for themselves, but has openly ridiculed the idea — N. Gregory Mankiw, the chairman of Bush’s Council of Economic Advisors.
A little over a year ago, the New York Times ran an article explaining that before joining the Bush administration, Mankiw, then a Harvard economic professor, scoffed at the very idea, which just happens to serve as the foundation for Bush’s fiscal policy.
The textbook includes a section on President Reagan’s economic policies, which, like those of President Bush, called for deep tax cuts and were based in part on the idea that tax cuts could help pay for themselves by producing faster economic growth.
In a section of his book entitled “Charlatans and Cranks,” Mr. Mankiw ridiculed the Reagan policies as “fad economics” that were tantamount to “fad diets.”
“An example of fad economics occurred in 1980,” Mr. Mankiw wrote, “when a small group of economists advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise revenue.”
After reviewing the impact of Mr. Reagan’s policies, which included a run of high budget deficits that lasted until the mid-1990’s, Mr. Mankiw wrote that the moral of the experience was that “when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate.”
In other words, if you’re not inclined to take the CBPP’s word for it, you can always believe the economist Bush hand-picked to head the White House Council of Economic Advisors.