Thursday, June 08, 2006

Why Bush's tax cuts are really tax increases

Alex Tabarrok from Marginal Revolution explains why the latest round of Bush tax cuts for the rich are actually tax increases:

I said yesterday that the Bush tax cuts are actually tax shifts. But that was being kind, once we take into account tax roughening, Bush's tax cuts are tax increases.

Deficits caused by tax cuts can reduce the total tax burden if they are used to smooth taxes. Too see why remember that holding tax revenues constant it's better to spread taxes across as many goods as possible. [...] The first dollar of wage tax causes you to cut back on the last hour of work, but your wage on that last hour was barely worth the lost leisure time anyway so the first dollar of tax doesn't create too much waste. Raise taxes more, however, and you cut into valuable infra-marginal hours.

Subtleties which, I fear, will be lost on the average person.

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