Big Picture Economics: How to Navigate the New Global Economy

Chapter 8

Tax Policy: Does Cutting Taxes Cure All Ills?

When it comes to government policy, nothing causes more arguments than taxes. Everyone knows that to provide services you have to pay for them. But what are “good” taxes, if there actually are such things, and which ones should be cut is a totally different story. Basically, everyone wants their taxes cut while keeping taxes on everyone else.

But even if you cut taxes, you can do it the right way or the wrong way. Some tax cuts can create significantly more economic activity but many other do almost nothing to improve the economy.

We need also recognize that cutting taxes is expensive, as every person or company is eligible for the tax if they meet certain conditions, regardless of whether they make use of that extra money. Some firms get a tax break even if they continue operating exactly the same as they before the tax break happened. And since households of varying income levels spend the extra income from reduced taxes at a different pace, who gets the tax break makes a significant difference. Therefore, the distribution of income is a major player in the effectiveness of tax policy. In other words, if the tax cut doesn't make economic sense, it simply becomes a way to redistribute income, not a way to expand growth.

But politicians still love to say that all you have to do is cut taxes and everything will be right with the world, which is why one of our favorite sayings is: if you get your tax policy from a politician, ...