Do Tax Cuts Cause Deficit?

If you have watched Fox News you are probably familiar with their "fair and balanced" panel discussions. They usually have two conservative commentators and two liberal commentators to discuss issues of the day.

One of their more interesting discussions was about cutting taxes versus cutting the deficit.

The commentators who favored tax cuts argued that tax increases would hurt small business owners who are the source of about 85% of the new jobs that are created. Therefore, tax increases would extend the current recession.

The commentators who favored deficit reduction argued that it was inconsistent for fiscal conservatives to support both deficit reduction and tax cuts at the same time. Their obvious assumption was that tax cuts reduce the amount of taxes the government collects and must therefore result in higher deficits.

Neither group discussed the issue of spending in relation to deficits.

But the tax cut advocates did argue that tax cuts increase total economic output and therefore result in higher tax collections. They also pointed out that past tax cuts have reduced the annual deficit and in some cases have helped to generate surpluses.

The liberals who argued in favor of tax increases to reduce the deficit apparently operate on the assumption that the economy is static and that tax policy does not alter economic activity. They seem to be unable to accept the idea that lower taxes results in more jobs and prosperity which in turn result in more tax revenue that can be used to reduce the deficits. Nor did they seem to be concerned about the impact of government spending on the deficits.

Vern