Myth 2: Cutting tax rates eventually leads to higher tax revenue.
Among Republicans, one of the great justifications for preferring tax cuts to increases in spending is that the tax cuts supposedly pay for themselves. Reagan said that if the government reduced taxes, people would "be more industrious; they'll have more incentive to work hard, and money they earn will add fuel to the great economic machine that energizes our national progress." The results were "more prosperity for all -- and more revenue for government," he said. "A few economists call this principle supply-side economics. I just call it common sense."
Reagan's belief has been passed down lovingly to each new generation of Republican leaders. For example, when asked about George W. Bush's tax cuts, the Republican leader in the Senate, Mitch McConnell, said "there's no evidence whatsoever that the Bush tax cuts actually diminished revenue." He continued: "They increased revenue, because of the vibrancy of these tax cuts in the economy." And he said that this "was the view of virtually every Republican on that subject."
It was not, however, the view of every economist. To be sure, there was a theoretical foundation to Reagan's belief. If tax rates were zero, the government wouldn't collect any revenue. If tax rates were one hundred percent, the government wouldn't collect any revenue, either, because no one would work for free. In between, however, there had to be a curve where revenue would peak at some level of tax rates. Reagan thought the United States was on the right side of the curve, and cutting rates would bring the nation closer to peak revenue. It wasn't true in the 1980s; his tax cuts led to the biggest budget deficit, proportional to revenue, that the country had ever seen. It wasn't true in the 2010s, either.
The Chicago Initiative on Global Markets asked its panel what would happen to tax revenue over the coming decade if income tax rates went up by one percentage point for the top earners. Reagan and McConnell's logic would predict a fall in revenue. Ninety-three percent of the economists on the panel said it would rise. Emmanuel Saez of the University of California at Berkeley, one of the world's top experts on taxes and income distribution, made direct reference to the curve: "Based on best estimates and even with current tax code, U.S. top rate is still significantly below revenue maximizing tax rate."
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