Thursday, July 27, 2006

Tax Cuts Raise Growth-If They Are Matched by Spending Cuts

Greg Mankiw quotes a Wall Street Journal summary of a Treasury Department report on tax policy.

The 3 main conclusions are:

1. Marginal tax cuts improve incentive for wealth creation and leads therefore to more wealth creation aka higher economic growth.

2. Tax cuts that do not improve incentives, like tax child credits or marriage penalty relief will however not improve growth.

3. The beneficial effects of marginal tax cuts presuppose that they are paid for by spending cuts. If paid for by increasing the budget deficit, -like Bush's were- they won't have any beneficial effects. Indeed tax cuts that do not improve incentives and is paid for by borrowing will in fact have a negative effect on growth.

These conclusions are very similar with the ones I presented exactly two years ago in my article "Does the Income Effect Argue for Taxes". It took the U.S. federal government only two years and a lot of well-paid economists to come up with the same conclusions that I presented then.


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