The tax fairy

The more preposterous an idea is, the more certain are its proponents of its unchallengeable veracity. Some of this is psychological self-defense, but much is calculation: as any self-respecting con man knows, the only way to put over a whopper is with a 100% show of confidence.

Thus a parade of Republican politicians of late have been insisting, with no ifs and or buts, that cutting taxes always increases revenues. "You don't need to pay for tax cuts. They pay for themselves," asserted the GOP candidate for U.S. Senate in California, Carly Fiorina, one among many peddling this line.

Thanks to the enduring power of arithmetic, one can calculate how large the stimulative effect of a tax cut would have to be to offset the reduction in revenue. The most optimistic possible assumption is that all of the increased GDP that results from reducing taxes is taxable at the current top 35% rate; at that rate, a dollar in tax cuts would have to generate $2.86 (that's $1.00/.35) in increased GDP to pay for itself.

Here's what Moody's Analytics calculated was the bang for the buck (pdf) of various fiscal stimulus alternatives — in other words, the increase in GDP that results from each dollar of Federal tax cuts or spending increases (click to enlarge):