Tax cut snake oil: Two conservative theories contradict each other and the facts

Briefing Paper #221

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Politicians have always faced the temptation to give their constituents tax cuts. But in recent decades conservative presidents have enacted large tax cuts that have been anything but conservative fiscally, and have justified them by appealing to theory. In particular, they have appealed to two theories: the Laffer Proposition, which says that cuts in tax rates will pay for themselves via higher economic activity, and the “Starve the Beast” hypothesis, which says that tax cuts will increase the budget deficit and put downward pressure on federal spending. It is insufficiently remarked that the two propositions are inconsistent with each other:reductions in tax rates cannot both increase tax revenues and reduce them at the same time. Being mutually exclusive, however, does not prevent them both from being wrong.