How many times have I heard that economically unimportant, politically loaded question? A hundred I bet. And how often do the tax cut's supporters botch the answer? Approximately nine times out of nine.
If I were confronted with that loaded question, here's how the Q&A would go...
Q: Did the tax cuts pay for themselves?
A: In the short run, who the hell cares? Aren't we supposed to be more concerned with our grandchildren in the long run?
If the tax cut's supporters don't start getting the answer right, our grandchildren's generation will pay the consequences. Tax-cut opponents are concerned primarily about winning the next election (...remember, our grandchildren can't vote yet); the tax-hikers know how to ask the trick question, and especially how to throw the knockout punch after the answer is botched as usual.
Senator John McCain is the latest to botch the answer, and that mistake got him top billing recently at FactCheck.org, in an article titled "Supply-side Spin"; here's the article's tagline:
Sen. John McCain has said President Bush's tax cuts have increased federal revenues. But revenues would have been even higher without them.
Carefully reread that last sentence. Here's what it means: "Tax revenues today would have been higher without the tax cuts." Importantly, here's what it does NOT mean: "Tax revenues now and forever would have been higher without the tax cuts."
To illustrate why that subtle difference is so important, here's a two-part brain teaser...
Part 1: Which economy would yield higher tax revenues when our grandchildren's generation takes over fifty years from now: (a) a $75 trillion economy; or (b) a $96 trillion economy?
Part 2: Which taxation policy is more likely to enable the private sector to grow the economy the extra half-point per year it would take to achieve a $96 trillion economy for our grandchildren: (a) today's lower tax rates; or (b) yesterday's higher tax rates?
Obviously, the missing but all-important factor in the trick question is long-run economic growth. The $96 trillion economy fifty years from now would result from an extra one half of one percent growth. Although it's true that tax rate cuts always reduce tax revenue in the short run, tax rate cuts set up private-sector incentives for boosting the economy's growth rate, which grows the tax base, which increases tax revenues in the long run. If the tax cut hasn't "paid for itself" yet, it's because the long run hasn't arrived yet; i.e., it's because we haven't given compound growth long enough for its magic to become visible yet. [For a few charts depicting those effects, see The Curse of the Free-Lunch Bunch.]
I'm sure that Rudy Giuliani, Fred Thompson, and Mitt Romney get it, and I think John McCain gets it, too, because his campaign aide had the right answer, and I presume he listens to his aides. I just wish they'd all practice the right answer to the trick question before it comes at them again.
[Indeed, I'd like to be able to say I think the Democrats get the growth idea, too. But given their anti-growth tax-hiking rhetoric, that would imply I think they're dishonest schemers—so for now I'll just say I think they don't get it. In other words, I think ignorance is a more likely explanation than dishonesty. I reserve the right to modify that assessment as the campaign unfolds, however.]
In summary, here's the wrong way and right way to address the tax cut issue...
Wrong way (what McCain said mistakenly, because although it may be true, it is arguable):
"...the fact is the tax cuts have dramatically increased revenues."
Right way (what he should have said, because it is unarguable):
"...the fact is that tax rate cuts not only end recessions sooner, but they also help to boost growth, which dramatically increases tax revenues in the long run -- just what our grandchildren will need when they take over."
Did the tax cuts pay for themselves? My answer is more concise: "In the short run, who the hell cares?". No wonder I'm not a politician.
Some people think that tax rate cuts and tax rate hikes have no effect on economic growth; in other words, that people do not respond to incentives or disincentives in the taxation system. I think that hypothesis belongs under the heading "wishful thinking," and I strongly suspect it is driven by hidden political agendas rather than rational thought. In short, it's balderdash.