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Politics : American Presidential Politics and foreign affairs
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To: DuckTapeSunroof who wrote (48925)1/10/2012 5:57:48 PM
From: TimF  Read Replies (2) of 71588
 
Dynamic analysis is likely to be an improvement, but its rather hard, and also depends on the assumptions you use.

In a sense static anaylisis is a special case of dynamic analysis, with the assumption that people don't respond to the factor your changing. That's often a rather silly assumption because people respond to incentives, but the problem is its not often clear exactly how or how strongly people will respond.

Judging by historical evidence, there is a significant deadweight loss from taxation that increases as tax rates increase. In addition to the deadweight loss, you also get more avoidance and evasion as taxes go up. In the short to medium run most tax cuts do probably decrease revenue, even when you consider the dynamic response (except from very high tax rates, or taxes on investments), but

1 - The short run harm to the private sector is greater than the short run increase in revenue.

and

2 - Long run the increase in economic growth, can cause the net result of the tax cut to be higher revenue, esp. when you add it to the decreases in avoidance and evasion, which happens short, medium and long term. OTOH tax policy doesn't stay static for the long term, and even without changing it tax policies there are so many factors in a real world economy that it can be hard to know the exact result of one of them.
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