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Too Good To Be True: Tax Cuts Do Not Pay For Themselves

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Abstract:

Do tax cuts pay for themselves? This past week, the House Budget Committee approved legislation that would require all expansions of entitlement programs to be paid for with offsetting cuts in spending. When asked by a reporter why a similar “pay-as-you-go” requirement was not applied to tax cuts, Chairman Nussle responded that “Tax cuts don’t need to be paid for [with offsets] — they pay for themselves.” 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.