Thursday, July 24, 2008

Do tax cuts increase economic growth?

The claim made by politicians who support "supply-side economics" is that tax cuts increase economic growth. In general they do to a point, but the EconoSpeak blog adds a caveat:
The claim that tax cuts lead to more output via incentive effects presumes that we are talking about fiscally neutral reductions in taxes and government spending. What we got from the Reagan and Bush 43 administrations – and what is proposed by McCain – is a reduction in taxes that is much larger than any proposed reduction in government spending (government spending as a share of GDP actually rose under Bush43). The impact of this fiscal stimulus was a reduction in the national savings rate, which lowers long-term growth.

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