How Much is a Tax Cut Worth?

Obama announced his budget and spending deficit plan early this week.  Obviously it’s generated a lot of conversation and debate  Most of it partisan.   I’m going to stay out of the fray on this, but I do have two questions and if anyone in this community can answer them, I would appreciate it.

How much is a tax cut worth?

I don’t like taxes.  I don’t want to pay anymore than I have to.  That being said, we’re in a bit of fiscal trouble in this country and we have to get out of it, REGARDLESS of who’s fault it is or who’s to blame.   There is a large contingency in this country who want to reduce taxes. They say it will spur the economy and investment.   OK.  But by how much?   For every dollar cut in taxes how much is returned in tax revenue from growth.   Let’s be sure, that’s exactly what the theory is.  You cut taxes now, you make more taxes later.  The more taxes later comes from economic growth.   Assuming this theory is true I want to know how much we can expect back in taxes for every dollar we cut in taxes.  Does a 1 dollar tax cut create 2 dollars in new taxes?  Is it 50 cents?  Is 10 cents?   Is it 20 dollars?  Does anyone know?

I also have another question.

How long does a tax cut generate more taxes?

A tax cut is permanent (until it’s repealed). Therefore, every year the dollars NOT collected via the marginal tax rate it must be made up through growth, more money being made.  But how long can this last.  Is it a declining return?  If a dollar tax cut brings in 10 dollars in more taxes, does that stay constant or does it decline as we move further from the initiation of the cut.  Is it 10 dollars the first year, then 5 the second, the 3 the next etc.  Or maybe it’s only 1 dollar the first year, then 4 the next then 10 the next, before it starts to slide back down again.  I would really like to know how long a tax cut generates more taxes.  Is it infinite or do tax cuts have a shelf life?

Other words for taxes are revenue (like what companies have) and income (like what people have.)  Reduced revenue or income doesn’t bode well for people or companies.   Not sure why it bodes well for countries, especially those already running spending deficits.

Tax cuts should be looked at like an investment.   What is the return on a tax cut?

I would love it if anyone could explain the value of tax cuts in real dollars, with evidence.  If nothing else it could help me, and I’m sure others see past the rhetoric.

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