From Tax Foundation, a non-profit, non-partisan tax research organization based in Washington, D.C.
Can a tax cut pay for itself? Most economists would probably agree that the answer is generally “rarely, but usually not.” However, this question is often mixed up with a different one – “can reforms that lose revenue on a static basis pay for themselves?” It’s incredibly important to realize that the second question is distinct from the first, and that the answer can easily be “yes.” Tax reform is not a matter of raising or lowering a single tax – it’s a combination of tax cuts and tax hikes, and the swapping of particular sources of revenue for others. Since the economic effects of different taxes differ, reforms that are scored as a static revenue loss (and thus be popularly thought of as a “tax cut”) can easily raise revenue when their economic effects are accounted for. The people who completely dismiss the idea that a tax cut can pay for itself are usually on solid ground when considering a single tax only, but it’s wrong to extend this skepticism to any tax reform that shows a static revenue loss.
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