Problem: There's a widespread belief that the cash flow effects from the tax cut will dominate the interest rate effect, so that an increase in the government deficit can increase GDP. Some commentators have gone further, asserting that these growth effects will be so large that in the new equilibrium total taxes will be higher, even with a lower tax rate. Back in 1974, the economist Arthur Laffer proposed that the benefits of increased growth brought on by tax cuts could increase the overall size of the economy. This would mean that at certain levels of taxation, it would be possible for the government to cut taxes and actually shrink the deficit.
What do you think? Does this make sense? Why or why not?