Riddle me this. Why is it that when the predicate contains “common sense”, the conclusion defies logic?
Recently in the United States, a number of so-called “deficit hawks” are advocating an extension of the Bush Tax Cuts while insisting that the deficit be brought down. This makes no sense to me.
Let me present a model simple enough for me and my MBA colleagues to understand (I am not very good at math). Imagine the erstwhile Kingdom of Carteronia. Gross Domestic Product (GDP) in Carteronia is CD$ 1,000. The government levies a 30% tax on all economic activity. (The tax is the same for all income levels and for capital gains, so we don’t have to worry about wealth transfers, incentives or industrial policies). Thus, revenues are CD$ 300 (1000 x 0.30) and the government has a balanced budget. Recently, our rulers have decided to reduce the tax rate by three percentage points to 27%. In order to maintain the same level of government expenditures and not run a deficit, GDP would have to grow in one year to CD$ 1,111.11 (300 ÷ 0.27). This is an 11.1% growth rate and has to be stimulated by the tax cut and over and above the rate of inflation.
Think an 11.1% growth rate is possible? Well, it would be nearly 4 times the annualized growth rate of US Real GDP, which was 2.96% between 1945 and 2009. (It was only 1.70% per capita.) (See, http://www.measuringworth.com/growth/#) Still think this is possible? Consider the velocity of money. Under the tax cut, citizens have a reduced tax liability of CD$ 30. Assume that they spend every last cent in the private sector. Then every person has to spend every last cent of their reduced tax liability as well as any additional income it might generate several times – in fact about 35 more times in the year.
Insight: I don’t like paying taxes. No one likes paying taxes. If you like to pay taxes, you should have your head examined. Nonetheless, we all like the benefits that taxes can buy – the common defense and the general welfare, including: police, courts, highways, national defense, etc. What the reduce-taxes and reduce-the-deficit augment hopes to do is: 1) dispense with a liability while retaining the attendant asset and 2) achieve an objective by deliberately behaving in a way guaranteed to produce these opposite result. To an MBA’s mind, this is illogical.
