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Obama’s Math Works Only in BizzaroEcon World

Posted By Don Boudreaux On December 12, 2011 @ 11:33 am In Budget Issues,Economics,Myths and Fallacies,Prices,Reality Is Not Optional,Seen and Unseen,Taxes | Comments Disabled

Last night on “60 Minutes [1]” (HT IndianaJim) President Obama said to interviewer Steve Croft about tax cuts:

Steve, the math is the math.  You can’t lower rates and raise revenue, unless you’re getting revenue from someplace else.

This answer reveals a deplorable understanding of either economics or math or both.

Revenues are the product of the “price” per unit (for example, the tax rate on a dollar of income) multiplied by the number of units for which that price is paid.  If the percentage cut in the price per unit is smaller than a corresponding percentage increase in the number of units for which the now-lower price is paid, revenues don’t fall; they rise.  The math, indeed, is the math.

Obama’s math works only in a bizzaro economic world – a world where changes in prices have no, or never more than a de minimis, effect on people’s behavior.

In that bizzaro world producers would never lower prices.  (Why do so if lowering prices won’t result in a larger sales volume and higher revenues?)  In that bizzaro world McDonald’s would charge $1,000 for each Big Mac.  (Why not, if prices don’t affect people’s consumption choices?)  In that bizzaro world no one would propose taxing cigarettes to discourage smoking.  (Why do so if higher prices don’t affect behavior?)  And in that bizzaro world no one would ever call for higher tariffs to protect domestic producers from foreign competition.  (Why do so if raising tariffs does not reduce the number of imports that people buy?)

It’s one thing to question a claim’s empirical relevance; it’s quite another to dismiss it categorically as being an alleged violation of the laws of mathematics.

What sorry testimony about the “reality-based” political community that the current President of the United States believes it to be simply a matter of “math” that lower tax rates necessarily result in lower tax revenues.

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