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Principles of Economics- Mankiw (5th) 169

Principles of Economics- Mankiw (5th) 169 - CHAPTER 8 A P P...

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CHAPTER 8 APPLICATION: THE COSTS OF TAXATION 175 account how taxes alter behavior. Conversely, when Bob Dole challenged Bill Clinton in the election of 1996, Dole proposed cutting personal income taxes. Al- though Dole rejected the idea that tax cuts would completely pay for themselves, he did claim that 28 percent of the tax cut would be recouped because lower tax rates would lead to more rapid economic growth. Economists debated whether Dole’s 28 percent projection was reasonable, excessively optimistic, or (as Laffer might suggest) excessively pessimistic. Policymakers disagree about these issues in part because they disagree about the size of the relevant elasticities. The more elastic that supply and de- mand are in any market, the more taxes in that market distort behavior, and the more likely it is that a tax cut will raise tax revenue. There is no debate, how- ever, about the general lesson: How much revenue the government gains or loses from a tax change cannot be computed just by looking at tax rates. It also
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