Friday, November 2, 2007

Can Tax Cuts be Harmful?

Can Tax Cuts be Harmful?

Perhaps so.

In yesterday's Wall Street Journal, "Pete" du Pont points out that lower tax rates increase tax revenues. (The Heritage Foundation keeps a more permanent thesis on low taxes = more revenue here.)

So, let's accept this premise: Lower tax rates encourage production, which then raises incomes, which then increases government revenue. Win, win, win, win, win.

But what will the government do with this extra revenue? They will spend it. And they will spend it on either government employees or some other part of the parasitic sector: Expanded government agencies, new entitlements, idiotic programs, etc., etc., etc. And that will tend to shift people from productive work to the parasitic dole. Instead of being productive, they will be net consumers of resources.

Now, doesn't that bring us to a disturbing paradox; i.e., lowering taxes might actually expand the stagnating welfare state.

Does that mean that raising taxes might sometimes be beneficial precisely because it reduces government revenue?

Of course, there's some point where raising taxes, to say, 100% reduces revenue and productivity. But can a 1% tax increase be beneficial if it lowers government spending?

I don't know -- and apparently neither Pete nor The Heritage Foundation cared to look into this.

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