I was listening a week or so ago to a C-Span broadcast of an event at George Mason University at which three speakers were analyzing the upcoming debate over the so-called fiscal cliff. One of the panel participants, a professor at George Mason who shall remain nameless, said something shockingly wrong, but it elicited no comments from the other panelists or the audience. The statement was that it would be extremely difficult to reach an agreement with Republicans on deficit reduction because “Republicans generally believe something that is just not true—that increasing taxes will not increase revenue.”
To give this professor the benefit of the doubt, I’ll assume he’s just ignorant. The alternative is worse–that he is so biased in his political outlook that it prevents him comprehending very simple ideas. In either case, this is very troubling. It shows that an educated person, as most professors are, does not have the basic knowledge about economics necessary to understand the current debate over taxes. Above all, it suggests the seriousness of the problem the GOP faces in making its case.
For avoidance of doubt, as the lawyers say, here’s what Republicans mean when they say that they do not want to raise tax rates. Of course, if taxes go up that will produce more revenue. There is no question about this. There is an argument, however, accepted by most Republicans, that if taxes go up it will not raise as much revenue as projected, because of (i) tax avoidance and (ii) reduced investment and work by taxpayers; but that does not mean that increased taxes will not increase revenue.
Our benighted professor might have been confused by a misinterpretation of the so-called Laffer curve, which holds that there are two points on a taxation curve at which the government receives no revenue from a tax—0% and 100%. This statement is undoubtedly true, but no one knows—including professor Laffer—where on the curve tax revenue is maximized. It is not true, as our professor may believe, that revenues can be immediately increased by reducing taxes.
“Immediately” is the key word here. When Republicans argue for tax cuts, they do say—and with justification that I won’t go into here—that over time tax cuts will produce more revenue than tax increases. This is because tax cuts—again, over time—tend to reduce tax avoidance and encourage more work and investment, which in turn produce income for people and hence more tax revenue.
Given the level to which education has fallen in much of the country, it’s possible to believe that some people cannot understand the difference between the short term and long term results of a tax cut, but if this degree of ignorance has reached the professoriat, we’re all in trouble.