Does a rate cut not lead to a cutback of the social spending?
A first misunderstanding is to suppose that rate cuts lead to lower tax receipts. Nothing is less true. Here the Laffer-effect comes into play. Every rate cut broadens the tax base because tax evasion and fraud becomes less profitable. The Flamisch government had already a small taste of the benefits of this Laffer-effect. Since they lowered inheritance rates, their tax receipts from inheritances have dramatically risen. Morover one should remark that lowering inheritance rates does not motivate to die early. If governments cut rates on incomes however, they may expect the supplementary benefits of the so-called Armey-effects. Low rates on income motivate people to go back to work, to perform some overtime, to start their own business, or to delay retirement. This broadens the tax base still further. Moreover, the financial resources that flow back to the private sector are invested much more productively there than in the public sector. Ireland has demonstrated the effectivity of the
