Now where to start. Hmm.
It seems that no evidence will be convincing to you that cutting taxes will generate additional revenue. The fact that revenues doubled during Reagan's eight years (about $500 billion to over $1 trillion) will, of course, be discounted by you by external mitigating factors. Even if I were to present a graph with tax rates going straight down and revenue going straight up wouldn't be enough, I see. Fair enough. None of our rules require that you believe me.
Now here are two questions that go to the heart of the matter. Excellent questions, btw. The answers will require digging into Econ 101 which you've essentially tossed out the window as not true seeing as you've said that just because Econ 101 says it's true doesn't mean it is. But we'll have a go at it anyway.
Why are taxes so poisonous? Why? Governments collect taxes to use that money for the common good. What is so incredibly bad about it?
Let's tackle the second one first. It seems from your statement that you believe government only does good. I'll answer why it's actually bad for the health of the economy. Remember a while back while presenting the theory of supply-side economics when I went through the calculations for Gross National Product (GNP)? The following is what you'll find in pretty much any economics textbook, not just one that discusses supply-side.
GNP = C + I + G + EX - IM
C = Consumption
I = Investment
G = Government
EX = Exports
IM = Imports
Let's take a look at that G component. Government, at least in a capitalist economy, produces nothing at all. Every dollar it spends is taken directly from the private sector. So you basically subtract from the C and I components to get G. So G is a net zero gain. Most of government spending is transfer payments, which also adds nothing to GNP because the definition of GNP is the total value of goods and services produced by an economy. This has always been the best measurement at determining the health of an economy, and in turn, highly correlates with the tax revenues generated. Again, that's Econ 101. Ignore it if you wish but these theories exist for a reason.
The parts of G that add the most to GNP are defense spending and infrastructure (roads and bridges) expenditures. But again you can't have any of those without taking something from C and I. Welfare, entitlements, and such, add zero to the G component. Recipients of such welfare do add to C, though. But that's a wash since you have to take away from C and I to indirectly add to C through transfer payments.
Government cannot spend a nickel without taking it from the private sector. So as G gets bigger, I and C get smaller. It's a zero-sum game. You may bring up deficit spending. Isn't deficit spending going to make G bigger while taking away less from I and C? By and large, borrowing has a crowding out effect, making the supply of capital less for the private sector. So deficit spending has an effect of boosting G but making I and C smaller as credit is less available and more costly. If you borrow from abroad, that would be the case where the additions to G would outweigh the losses in C and I, but we are in agreement that heavily borrowing from foreign investors isn't a good thing. What we disagree upon is the impact of tax cuts on tax revenues. Whereas I say the best way to balance the budget is to cut spending and reduce taxes, your prescription is to raise taxes. But we'll see why raising taxes is such a bad idea in a short while.
Let's take a look at the I component. Investment is the most important component of this whole equation and this is where tax rates have a great impact. The basic question is how do you get an economy to grow? Government cannot do it since whatever government adds to GNP is subtracted by what it takes out. Consumption is consumption, adding close to $1 for every $1 spent. Investment, on the other hand, is where growth actually occurs.
In Econ 101, there is the term, the "multiplier effect." The multiplier effect occurs when "money begets money," essentially that the spending of money in turn allows the economy to generate even more money. How is this done? Investment is the expenditure of monies on capital equipment and new businesses. When additional capital is available, more goods and services can be produced. Hence the multiplier effect. Spending a dollar on capital equipment has a return of far more than $1. That $1 creates the ability to create even more goods and services than existed before, so the capacity of the economy grows. With higher capacity, the output of the economy grows. Heavy expenditures on the I component, therefore is really the optimal way to grow an economy. C can't do it alone. G doesn't help the economy grow. The multiplier effect actually has the result of boosting all three components. C is boosted because of the job-generating effects of increased investment. G is boosted by higher tax revenues brought on by higher output.
This leads into the answer for question 1. Why are taxes so poisonous? Companies decide on investments based solely on one calculation, the return on investment, or ROI. ROI is based on the amount of expected revenue subtracting the initial investment AND ALSO SUBTRACTING ANY TAXES PAID ON THE GROSS ROI. When taxes are low, ROI grows and becomes very attractive. When taxes are high, ROI falls. If ROI falls, companies have less incentive to invest and therefore higher taxes result in a drag on investment and reduces the capacity of the economy to grow. Growth slows and net tax revenues fall. So when ROI grows, that's when the I component grows the most and thus, the multiplier effect has a greater impact on the economy.
So lower taxes equal a far faster growing economy. A higher tax rate and higher rate of government spending equals slower growing I component and therefore a slower economy.
I mentioned this earlier; both supply-siders and socialists agree on the stimulative effect of tax cuts. John Maynard Keynes is the economist socialists respect the most, seeing as he was one of them. His theory was to cut taxes during an economic downturn because that would stimulate the economy to grow and get out of recession. During an economic expansion, he advocated raising taxes as a way to slow down the economy to prevent overheating. Overheating economies run the risk of inflation. On the other side of things, Keynes also advocated increasing government spending and running a deficit during economic downturns and also cutting spending during economic expansions.
