On Tax Cuts And Revenue

Governments must raise revenues to finance vital functions; we all know this and have very little choice in the matter as those decisions were made many generations ago (i.e. social contract theory). Life’s lottery has placed me squarely in the United States; it is a Land of Opportunity™, where economics and government are oft discussed and poorly understood. Because of this lack of understanding, the average citizen supposes our government does more than it can reasonably or legally be expected to accomplish.

I’m really discussing a particular affiliation here, and that affiliation is…all of them. Made you look.

Nevertheless, people of no particular political affiliation will discuss for hours the notion that tax cuts are expenditures to be paid for rather than a decrease in revenues. It’s all on the backs of the poor, dammit! Does this honestly make any sense to folks? Politicians sure take advantage of this notion.

It is because of this framing, that when we talk about tax cuts, it becomes very easy for those opposed to these cuts to paint them as something that has to be paid for—or more sinisterly, as some kind of cash grab for a favored class. It is as if it is the government handing over money, rather than the government simply not collecting it.

We can think of taxes as a form of government revenue, or sales, in the business sense. Reducing the price of one product does not mean that business is simply handing over cash to its customers—even if they run sales claiming as much. But that move can do a couple of things for that business. If the reduced price doesn’t affect the number of units sold, then you will see a reduction in sales. However, and this is the most likely scenario, that reduction in price is most likely going to increase the demand for that product and increase sales. A tax reduction can also work this way, depending on the category of tax. It can encourage investors to move money into the economy, and increase government revenue.

This all seems rather counterintuitive, but think about this: no decision is isolated. Everything has an effect on something else, and all decisions encourage or discourage other actors from making specific decisions. What do you think?