Arnold Kling  

The Economic Consequences of Mr. Bush

From Comic-Con to Econ... Lazy Thinking...

Robert Carroll and Greg Mankiw discuss the Treasury department's analysis of the long-run (supply-side) effects of the Bush tax cuts.

The Treasury's main analysis assumes that lower tax revenue will over time be accompanied by reduced spending on government consumption. But the report also shows what happens if spending cuts are not forthcoming. In this alternative scenario, a permanent extension of recent tax relief is assumed to lead to an eventual increase in income taxes.

The results are strikingly different. Instead of increasing by 0.7% in the long run, GNP now falls by 0.9%. Tax relief is good for growth, but only if the tax reductions are financed by spending restraint. One exception: Lower taxes on dividends and capital gains promote growth, even if they require higher income taxes.

And if the tax cuts are "financed" by increased government spending?

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CATEGORIES: Fiscal Policy

COMMENTS (1 to date)
aaron writes:

But this ignores interest rates. Shouldn't government spending be a function of interest rates more so than tax rates?

A low tax rate should reduce spending, except when interest rates are unusually low, since less projects would generate enough future revenue to offset the cost. But when interest rates are near zero, all spending that isn't purely consumption is worthwhile.

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