President Donald Trump proposed last month a tax plan that would lower the top individual tax rate to 35% from 39.6%. It would also lower the corporate income tax rate to 20% from 35%.
The plan however, says nothing about how spending will be cut to avoid increasing deficits. According to supply-side economics – a relatively new school of economics – a reduction of tax rates and lower revenues for the government does not need to be offset by decreased government spending or increased borrowings.
It is held that the boost in consumer spending and investment in capital goods will set the platform for a stronger economic growth, which in turn will lift government revenues and trim the budget deficit.
Effective tax depends on the size of the government outlays The problem rests with the fact that the government is not a wealth generating entity as such – the more it spends, the more resources it has to take from wealth generators. What really counts is the amount of wealth diverted to government from wealth generators.
Irrespective of the official lowering of tax rates, as long as government spending is not curtailed, there is not going to be an effective lowering of the government tax.
This post was published at Ludwig von Mises Institute on October 12, 2017.