Here is my question for all of you: say you have to choose between cutting taxes (but not spending) and not cutting taxes (thereby balancing the budget). Which would you choose? Why?
The assumption here is that it's politically impossible to cut spending (e.g. Medicare).
I would choose cutting taxes for several reasons. First, deficit financing is less tyrannical than forcefully taking money from people. Secondly, a permanent tax cut would increase after-tax income, which would encourage investment and it would encourage people to take on extra work. Thus, a permanent tax cut would have a demand-side and a supply-side effect. The increased investment would also increase long-term economic growth. Lastly, I don't think deficits can be too harmful as long as the government debt is less than 100% of GDP and as long as the debt grows by less than the growth of the economy.
So, as an example, what would happen if the US eliminated the death tax permanently? Well, for one thing, the federal government would lose some $30 billion in tax revenue (this isn't accounting for gains in personal income and corporate income tax revenue as a result of the tax being eliminated). Thus, the federal deficit would increase by a few billion dollars. However, the tax cut would encourage investment and increase after-tax income, especially for the small businesses that get hit hard by the death tax. In the long run, this tax cut would encourage enough economic growth to offset the growth in government debt. In fact, in the long run, tax revenues would rise enough to offset the previous tax cut.
That said, I still support cutting taxes and spending whenever that's politically possible, mainly because government spending has a negative economic effect. Unfortunately, I don't think that cutting spending is politically possible in the present political climate where the majority of "Tea Partiers" - the supposed far right - are in favor of keeping behemoth socialist programs like Social Security and Medicare.
Sorry if this was a little hard to understand. I just woke up and I'm still pretty groggy. I'll clarify if anything is too difficult to understand.
Political Atheists Blog
where are we assuming marginal tax rates would have to be to balance the budget?
EDIT: Because I read that a study by the Brookings Institute suggests that marginal tax rates would have to be something like 60-70 percent for the next ten years without any increases in spending to balance the budget just through tax raises.
Assume that marginal tax rates are on the left side of a year-long Laffer curve. Basically, what I'm saying is that the longer the time period, the further left is the focus of the Laffer curve. In other words, on an infinitely long time scale, infinitely small tax rates (by this I mean something along the lines of 0.000001%) would be the most efficient rate of taxation.
Because I read that a study by the Brookings Institute suggests that marginal tax rates would have to be something like 60-70 percent for the next ten years without any increases in spending to balance the budget just through tax raises.
I'm assuming here that the budget is balanced and you have the option to cut taxes but not spending. My point here is that over the very long run deficit-financed tax cuts can be beneficial to private individuals as well as the state.
So if we assume that no taxes are raised from present levels and no additional spending takes place, then perhaps in 100 years the budget will balance of its own accord.
They're both the same.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
No they are definitely not the same.
Tax cuts are good in themselves - for their own sake.
Do people not understand the supply-side effect?
It's wrong to say that amount of spending is the only thing that matters. For a thought experiment, consider raising a certain amount at a rate of 70% - a rate to the right of the Laffer optimum, and also consider raising a certain amount at a rate of 10% - a rate to the left of the Laffer maximum. Obviously, these policies are not both the same - the lower rate is beneficial so long as they raise the same amount of revenue (and often otherwise). So the principle holds - the amount of spending is not the only variable.
Okay, now on to the case where you can either run deficits with tax cuts, or balance the budget with tax raises. The thing that people aren't getting if they claim that both options are equal is that higher taxes block wealth production (duh). So when you balance the budget, maybe you take "x" amount of wealth from the private sector and give it to government, leaving "z" wealth in the private sector. But when you don't balance it and leave taxes cut, then the private sector doesn't just have "x" + "z" (and also "-z" for the inflation) - it has another "free lunch factor" - call it "y" - which arose because wealth production was incentivized with lower taxes.