So the argument in favor of tax cuts has been that they pay for themselves in GDP growth, which increases tax revenue and offsetting the cut. My understanding is tax cuts only create about $0.30 in GDP growth for every $1 in gov. revenue spent and are a pretty poor way to grow GDP. Things like cash transfers to the poor cause much more GDP growth, about $1.60 per $1 spent, but that still is far from breaking even as that seems like it would only create about $0.40 in revenue per $1 spent.
It seems you’d need almost $3-4 in GDP growth for every $1 in tax dollars spent to have a government intervention pay for itself, assuming generally about 25-35% of GDP goes to tax revenue in one way or another like federal, state, local, county, etc. taxes.
Lots of government program do. But the calculations are involved and arcane.
Many years ago, one study compared lifetime earnings of veterans who went to college on the GI Bill and those that didn’t. The college vets earned so much more over their careers that the extra taxes paid for the college subsidy several times over.
(In general, education pays for itself.)
In the Great Depression, a dam was built in the middle of nowhere in a dry area of the West. Formerly little used land was converted into highly productive farmland. Both sets of my grandparents were drawn to the new land opening up because of this project. They and thousands of others pay, and continue to pay, back in taxes and fees the cost of the dam many times over.
And on and on and on. It helps to have a very long term view of things.
The Louisiana Purchase has probably made back the money that was spent. Probably similar for the homestead act, although it’s harder to say what the opportunity cost was there.
Shhhh! We’re just biding our time, waiting for the US economic collapse, and then - Florida and Arizona are ours! Warm winter resort areas under Canadian control!!
I’m not sure where those figures come from, but the one for direct payments seems low to me. It might be accurate for the current economic climate, but I don’t think it would be generally.
Govt spending should take into acct the multiplier effect (money multiplier) that results from having a fractional reserve banking system. A low income person gets cash and we’ll assume most goes to buy goods and services. So the businesses receiving the money deposit it. The bank keeps 10% for it’s reserve requirement and loans the rest. Now there’s an additional 90 cents in the economy which gets spent . . . and so on and so on.
So I suspect that any direct spending that goes directly to economic participants like companies, workers, beneficiaries, etc, will have a significant impact over a period of a few years as the multiplier works it’s magic.
But there’s another consideration too. Govt really exists to deal with the intangibles and unquantifiables. So let’s say you increase funding for student loans. How do you measure the benefit, the return on your investment (ROI). Clearly it benefits the society and economy in the long run, but you can’t really value it in any meaningful sense.
Making ROI a criterion for spending completely reshapes the concept of what govt is and is suppose to do and care about.
You’re getting your vocabulary crossed a bit here. A tax cut is not an expenditure, it’s a reduction in revenue. The government isn’t spending a dollar by giving me a $1 tax cut. It is receiving $1 less from me in the first place. It’s not revenue spent, it is revenue not received in the first place.
That said, tax cuts can be a great way to spur the economy, but only if the government is running a surplus. If you’ve got 100 trillion in revenues and 50 trillion in expenses, then it certainly makes sense to lower the tax rates. Though one could also argue that the money should be put in a savings account for times of recession, but our Congress-critters seem incapable of thinking further ahead than the next election.
What we are doing now is not sustainable. Eventually, all of these bonds are going to reach maturity, and they’ll have to be repaid.
Ah, but here’s the problem with that. Without the damn, you are assuming those same people wouldn’t be working somewhere else and still paying taxes. And the money for the damn was taken out of the private sector. How do you account for the lost opportunity of how that money might have been invested otherwise?
I’m not sure it’s possible to say one way or another whether that project “paid for itself” in the sense that it generated more net income than if the money had been used for something else.
The OP mixes up GDP and tax revenue. If taxes are cut 1 billion dollars without a offsetting cut in government spending then GDP will go up one billion dollars. Likewise if government spending goes up without a corresponding tax raise GDP will go up. However, in order to pay for itself a government expenditure or tax but must bring in revenue to the government that makes up for the spending or lost revenue. An example is building atoll road for a million dollars that brings in a million dollars in tolls. This is without considering dynamic effects.
However, each tax cut or expenditure has a multiplier effect. An example would be building a road between two cities. This road then encourages trade and the government will receive taxes on the increased amount of trade. If the amount of the increased taxes is equal or greater than the cost of the road to the government than it could have been said to pay for itself. Cutting taxes on an activity will encourage people to engage in that activity and the increased amount of acitivity will increase the amount of taxes collected. An example would be cutting taxes on movies made in your state. If the tax cuts encourages enough movies to be made in your state that the amount of taxes from all the new movies is greater than the taxes collected from the previous amount of movies then the tax cuts paid for themselves.
Because taxes average around 20% of gdp to pay for itself a tax cut or government expenditure must cause 5X the amount of economic activity in order to pay for itself. This is a high hurdle and almost nothing will meet it. However, in the case of tax rates the higher the rate the easier it is for a cut to pay for itself.
There is also the variable of how elastic the activity being taxed is. Some activities respond greatly to changes in tax rates and some not at all. A famous example is the yacht tax of the early 90s. A deal was made to increase the taxes on yachts to raise money to close the deficits. However, since no one really needs a yacht, after the taxes were raised people stopped buying them and the amount of yacht taxes collected were less under the higher rate than had been collected under the lower rates. Once congress realized this the lower rates were restored. Contrast this with something like cigarette taxes, since people who pay cigarette taxes are addicted, raising taxes on cigarettes does not cause that many people to quit smoking.
The best estimate of the multipliers various tax cuts have that I have read is the Romer and Romer paper which indicates that it is about 3. IOW for every 1% of gdp that taxes go down GDP expands by 3%. Cite (pdf)
The best estimate of the multiplier of government spending I have read is by Woodward and Hall who put the multiplier at 1. IOW for for every 1% of GDP government spending goes up GDP goes up 1%. Cite
I think he’s saying the money used to pay for the damned dam came from taxes collected from the private sector. Not all government revenue comes from the private sector, but most of it has for a long time.
