A lot of the debate we have in America about economics (like many issues) ends up being statements of principle masquerading as analysis of empirical reality. And maybe this is my bias talking, but it seems like most of this comes from the conservative side. For example, it's now become disturbingly common to hear conservatives say that when you cut taxes, total tax revenues actually go up, since the tax cutting creates an explosion of economic growth that brings in lots of new revenue. This idea has zero empirical support. It isn't that cutting taxes can't increase growth somewhat, it's just that it doesn't increase it enough to make up for the lost revenue. Yet no matter how many times economists demonstrate that cutting taxes doesn't actually increase revenue, Republican politicians continue to claim that it does. This is widely known as the "Tax Fairy," since believing in it makes about as much sense as believing in the Tooth Fairy. But conservatives would certainly like it to be true. Their belief in low taxes, particularly for the wealthy, is really a moral position more than anything else. And if cutting taxes actually increased revenue and enabled us to cut the deficit, then that would be great too. But their moral belief is where things originate, and why empirical evidence that their preferred policy produces problems doesn't make them change their position.
I thought about this when I read this article in yesterday's New York Times by David Leonhardt, in which he relates a conversation he had with Paul Ryan about taxes. He gave Ryan a chart showing economic growth over the last few decades, to initiate a discussion about the efficacy of tax cuts. As you might remember, Bill Clinton raised taxes in 1993, and what ensued was a period of spectacular economic growth, with 23 million jobs created overall during Clinton's two terms. Then George W. Bush came in and cut taxes repeatedly, and what ensued was a decade of economic stagnation. How does Ryan explain the fact that in the real world, things worked out exactly the opposite of what conservative dogma predicts? His answer reveals the core contradiction at the heart of Republican beliefs about taxes: