The paper assumes an across-the-board 10% cut in all marginal tax rates.
The paper first notes tax cuts usually decrease revenue. The paper first uses an estimate provided by the joint committee on taxation that states the government will lose "466 billion in revenue over the first 5 years and 775 billion over the second 5 years." If you look at these tables from the CBO, you will notice this bears out historically. Both Reagan and Bush cut taxes in their first year in office, and tax revenue subsequently decreased.
Next, the CBO looks at the effect of tax cuts on individual behavior as a result of the tax cuts. In this phase of the study, the CBO is trying to determine if the resultant behavioral changes caused by the tax cuts is sufficient to make-up for the lost tax revenue from tax cuts. For example, are people so motivated by the decrease in rates that they work that much harder to offset the loss in government tax revenue?
The study divides individuals into three general categories: no foresight, lifetime foresight and unlimited foresight. People with no foresight don't make any plans for the future. People with limited foresight will change their behavior for their generation and people with unlimited foresight will change their behavior for future generations.
While all of this sounds somewhat odd, it actually makes a great deal of sense. An ideally rational individual will look at the decrease in tax rates and think, "the government will run a deficit for awhile. At some point the government will have to make-up for this revenue shortfall in the future by either raising taxes or cutting programs. Either way, I better save more than usual now so I can pay for those future higher taxes or future decreasing government programs."
OK - so what were the results?
Table 2 on page 5 of the study estimates the increased GDP growth caused by different individual group's behavioral change as a result of the tax cuts. The highest percent change in GDP is from people with unlimited foresight, whose behavior increases national GDP by .8%. Does this look like the average American consumer? Considering the national economic savings rate is now negative, I don't think this is the GDP bump caused in the US by tax cuts. The US looks more like an economy with no foresight (no planning). In this case, the GDP increase caused by people's behavior in relation to the tax cuts is .2%.
Next, the study looks at the increase in government revenue caused by different people's behavior in different scenarios. Remember those revenue shortfall figures from above? This part of the study is trying to figure out how much of the revenue shortfall is minimized as a result of changing behavior. The study concluded that: "the budgetary impact of the economic changes was estimated to offset between 1%-22% of the revenue lost from the tax cut over the first 5 years and add as much as 5 percent to that loss or offset as much as 5% of it over the second 5 years."
Let me translate the conclusion into English. The government would still lose 75% of the 466 billion that it would lose as a result of the tax cuts. To put it another way, the best possible fiscal result from individual's behavioral change as a result of a 10% tax cut would still cause a the government to lose a substantial amount revenue.
So, what can we learn from this study? Republican economic talking points are 100% wrong; supply-side tax-cuts do not cause a large enough change in behavior to offset the loss in government revenue as a result of supply-side tax cuts.
The RWNM will argue this is just a study and is therefore complete garbage. Of course, they say that about anything that contradicts an easy sell and good talking point. They will also overlook the fact that actual historical records prove them 100% wrong. If they keep talking, it must be true.
Thanks to Stirling Newberry for pointing this study to me
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