THE RIGHT WON’T LET THE TAX FAIRY GO…. The National Review‘s Andy McCarthy had an item yesterday, which was not an April Fools’ joke, and which served as a helpful reminder of why discussing tax policy with conservative activists tends to be frustrating.
We know that lowering marginal tax rates can increase federal revenue, but it’s clear that the President won’t cut taxes (not even for “95 percent of Americans”). So we need a Plan B….
So, if the government lowers taxes, the argument goes, government revenue necessarily goes up. It’s something “we” already know. Indeed, it’s so obviously true to McCarthy, he doesn’t bother to explain how he came to believe such nonsense.
The idea has been around for years, and it’s known in some circles as the “Tax Fairy” argument — all we have to do is lower taxes and, like magic, the Tax Fairy will boost revenues. Under this approach to tax policy, tax cuts just pay for themselves.
The problem, of course, is that the argument is wildly wrong. Dean Baker recently explained, “It is amazing to me that people have treated this as though it is a debatable point, because it is really not.” Or, as A.L. noted yesterday:
[I]t’s demonstrably, empirically untrue. We’ve lowered marginal tax rates multiple times, and it never produces more revenue. Even the most ardent supply-side economists don’t believe that tax cuts fully pay for themselves (they believe only a fraction of lost revenues are offset by supply-side effects).
In other words, only complete crackpots believe that McCarthy’s “Plan A” would increase revenue. Sadly, with respect to this issue, virtually all mainstream Republicans are now complete crackpots. Which goes a long way toward explaining why the Republican party’s budget proposals make absolutely no sense. How can you craft a coherent budget when your only idea for raising revenue is to massively cut revenue? If you’re working from that premise, why bother coming up with numbers at all?
What’s more, even if we accept McCarthy’s foolishness at face value, why wouldn’t officials just cut taxes all the time? As Matt noted, tax cuts tend to go over well with voters, so political leaders have an incentive to keep cutting. If “we know” lowering marginal tax rates can increase federal revenue, why would any politician ever oppose more tax cuts?
As for McCarthy’s contention that President Obama “won’t cut taxes … even for 95 percent of Americans,” didn’t we just have this debate? Hasn’t Obama already cut taxes for 95% of Americans?
How odd.
