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[Spanky]

Originally posted by Greedy,Greedy,Greedy
Okay, I know I'm going to regret this, but since you've built a house of cards on this statement, without listening to Ty or reading the blurb he's now posted twice, let me break this down.

Say, for simplicity's sake, that there is an economy with GNP of $1,000,000 (add zeros if the assumption is too much for you), and the government runs on tax revenues of $200,000. There is a 20% tax rate. The economy grows at 1% per year, so it adds $1,000 per year in growth.

Now say you cut taxes to 10%, so now the Government has $100,000 in revenues, and this results in the economy growing at 5% per year - a 5x increase in growth! With a tax rate of 10%, you are now collecting a whopping $105,000 instead of $101,000.

Fast forward ten years. With 5% growth per year, you will have an economy of roughly $1,600,000 rather than an economy of $1,100,000. You will still not have made up the revenue. You will have had to either run the Government on half the revenues, or have cut Government programs. Your cuts have not paid for themselves. Moreover, the gap between what the 20% would have raised with 1% growth and what the 10% raises with 5% growth is now over $200,000 per year, and there is either a $1.5 million debt or there have been severe cuts in government service, cuts which may, for example, undermine growth.

All this is simply meant to illustrate, a tax cut that results in growth will not always pay for itself. Cuts, like expenditures, must be managed in a reasonable and balanced way. But, if the fundamental basis of your economic theories are all based on the simplistic statement I've quoted above, you may want to think about them just a little more.

The simplistic statment that growth is good and is what you are looking for is not wrong. If you cut the taxes there is no way that the effects will probably kick in the first year. So it will take a while for you to increase to the 5%. In addition, the point you are leaving out is the deficit or spending. If you cut spending, and you cut spending on transportation and education (or law enforcement), then you will decrease growth. If you don't cut spending, but increase the deficit then there will be crowding out. The government will borrow a lot of money to pay the deficit, and that money won't be available to investors for buying factorys and such. That will also decrease growth.

Some tax cuts don't encourage growth. If you cut the capital gains tax, that won't stimulate the economy (in my opinion). So the key is to cut taxes in such a way to stimulate growth, but at the same time not hamper government programs that help growth and not increase the deficit to the extent that it will hurt growth (or that it will hamper growth more than the tax cut growth brings in).

But in the end if you can cut taxes and sustain five percent growth for a long period of time it will be worth it. Growth means everyone will be wealthier, you will have more revenue for schools and infrastructure and you can have lower tax rates.

So over the long run you do whatever you can to maximise growth. You avoid deficits not to be fiscally prudent, but because deficits hamper growth. Everything is done to maximise growth.