Repeat after me: Tax Cuts do not cost money

Repeat after me:  Tax Cuts do not cost money.

Say it again.  Tax Cuts Do Not Cost Money no matter how vehemently our elected representatives claim that cutting taxes costs the government money.  This fallacy has been around as long as there have been Democrats wanting to tax away your money.

Tax cuts don't cost money.  Of course, no taxes at all will not bring in any money to the treasury, but there is a rate at which the revenues will be maximized - and it's not a 100% tax.

This gets to the question of how much should we be taxed to provide revenues to the government; for the sake of this discussion we will leave out the whole issue of what the revenues should be spent on.  I found this interesting quote from an article written by Arthur B. Laffer:

It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.

That bit of economic wisdom was written by a 14th century Muslim, Ibn Khaldun, in his work The Muqaddimah.  Simply put, he means that it is possible to get more revenue from lower tax rates than one might get from higher tax rates.

The reasoning is simple:  more money in the economy creates more economic activity.  More economic activity will create more wealth to be taxed, whereas taking money out of the economy means there is less wealth to be taxed.  This is the point Democrats never get.

Ibn Khaldun also recognized a fundamental fact - dynasties and societies die, usually because tax assessments get too high.  This quote recognizes the Confucian cycle we've been talking about - taxes start out low, but go up over time as government takes on more and more bureaucrats.  Eventually, the system collapses because there isn't enough money left for people to live.

Our current economic downturn is yet another sign of this problem: people are cutting back on spending because they cannot earn enough money, and our government's solution is to take still more money away from them?

Split the Pie or Grow the Pie?

To use the old pie analogy: Democrats see the wealth of the country as a single fixed-size pie.  There is a finite amount of pie and we need to make sure everyone gets a piece of the only pie in town.

Conservatives (and libertarians, I might add) instead see the country as a pie factory.  There is an essentially infinite amount of potential pie.

Government regulations permitting, new products and services will be brought to market to create new wealth.  The best way for government to get more money is to make the pie bigger so people have more income on which to pay taxes.  That way government benefits along with the people instead of government benefiting by taking from the people.

Of course, when you make more pie the kitchen gets messy and some people, for a time, may get less for a while, thus having less pie in their life... but they're always welcome to get back in the kitchen.  The Democratic Party way is to seal off the kitchen so nobody can make any new pies, slice half the pie away, then let us fight to the death over the other half.

But back to the original point.  Tax cuts, unless they go too absurdly low (no risk of that!), are not a cost.

A recent graph showed the "cost" of the TARP included tax cuts.  The creator of the graph didn't explain where the tax cuts were coming from (or that many of the cuts were actually wealth transfer payments called "tax credits"), but they were included as a cost in the new stimulus bill - just like the costs of the pork in the new stimulus pork pot pie, even though the two are totally different.

By accepting the premise that tax cuts cost the Treasury money, we've already lost half the battle (and pie).  What is needed is for the Republicans, whenever a camera is in their face or a microphone is at their mouth, to say "tax cuts will increase revenues to the Treasury".

Prof. Laffer goes on to say in his Heritage Foundation article:

Moving from total tax revenues to budgets, there is one expenditure effect in addition to the two effects that tax-rate changes have on revenues.  Because tax cuts create an incentive to increase output, employment, and production, they also help balance the budget by reducing means-tested government expenditures.  A faster-growing economy means lower unemployment and higher incomes, resulting in reduced unemployment benefits and other social welfare programs.

Lowering tax rates costs the government less money because fewer people need government money!  Wow!

Mr. Laffer's articles contain lots of graphs and charts and data supporting his idea.  What's great about what he says is that there is actual historical data to prove it - it's not just an unproven theory.

The next time you hear anyone prattling about the cost of a tax cut, don't believe it.  Let everyone within sound of your voice know that tax cuts increase economic activity, lower government costs, and lead to increased government revenue.

Let's go make us some pie!  Just no pork pot pie for me, though.