This article asks a good question: if tax-cut strategies don’t work, why are they so popular abroad?
Even some economists I otherwise respect dismiss supply side theory as a gimmick, despite the mounting empirical evidence that cutting taxes boosts tax revenue. I think part of the problem is the poor way that supply-siders have made their case.
When governments cut taxes and don’t cut spending, they have to borrow money. This is usually done by issuing bonds. The government has to service the debt (make interest payments) and, when the bond matures, repay the principle.
Now consider the taxpayer. After a tax cut, taxpayers have some new money. Some of that money will be invested and generate new jobs, new profits, and new taxes. Will these new taxes offset the tax cuts? Of course not. But it’s quite possible that will be sufficient to service the new debt caused by the tax cut and perhaps a little extra to boot. But even if it only generates enough to cover the debt service, the government is no worse off.
The key question is what happens over time. If the new tax revenue continues forever, it becomes an annuity which services the debt. The government can continue to borrow and rollover it’s debt as long as the new tax revenues can support the debt service! The debt might exist forever, but that harms no one as long as tax revenue growth allows the growing debt to be serviced.
This is, in fact, the way many successful companies work. They use debt to grow revenue and are not eager to get all their debt repaid. It’s increasingly looking like this is also the way smart governments work.
