Do tax cuts hurt the economy?

Yes. The key to understanding why is something called “counter-cyclical fiscal policy.” Basically, if there is a sudden economic downturn (recession), a government can decrease taxes and increase deficit spending to “counter” the downturn. But, if tax revenues are already so low that deficit spending is already a runaway train (as in our current situation in the U.S.), there isn’t a lot of wiggle room, if any, to enact counter-cyclical policies. Eventually, perpetual deficit spending also tends to crowd out private investment over time, as interest rates begin to rise as a natural consequence of all that deficit spending. And this further contracts growth.

So although cutting taxes is an attractive short-term stimulus tactic, it generally is more of a “placebo” effect on economic expansion…and the economy will almost inevitably swing in the opposite direction (i.e. contract) over time. Which means that, as a rather nasty amplifying effect when recession inevitably arrives, the government will abruptly be saddled with a massive debt burden that now costs more and more to service (again, as interests rates rise as a consequence of constant deficit spending) — the debt servicing will become more and more a preoccupation of future budgets, which will cast around for cuts to anything and everything else, thus further weakening the economy. Alternatively, the federal government can become insolvent — which may actually be the irrational aim of certain neoliberal conservatives who dislike government “interference” in markets, and seek a purer laissez-faire economy.

In any case this is why “procyclical” policy (i.e. what the Trump administration is engaged in now) is pretty reckless.

My 2 cents.

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