The left's latest misinformation campaign claims that if President Bush would just call off the tax cuts, there would be more than enough revenue to make Social Security solvent in perpetuity. As perpetually wrong economist Paul Krugman put it in Monday's New York Times, "Repealing Mr. Bush's tax cuts would yield enough revenue to call off his proposed (Social Security) benefit cuts, and still leave $8 trillion in change."
What those on the left never tell you is they make this calculation assuming, contrary to all available empirical evidence, that no one's economic behavior changed at all when the Bush tax rate reductions were enacted. Under this ridiculous assumption, you don't need a Ph.D. in economics to calculate the so-called "revenue loss" - in Krugman's words $8 trillion. Here's how he calculates the so-called decline in revenues.
If nothing else transpires when tax rates on capital and labor are reduced, he simply multiplies the reduction in the tax rate times the amount of capital and labor that is subject to the tax (this is commonly called the tax base).
In the static world that liberals like Krugman inhabit, people don't save and invest more when the tax rate on dividends and capital gains is lowered. People don't work harder when the tax rate on labor is reduced. Entrepreneurs don't start more new ventures when the capital gains tax rate is reduced, and businesses don't invest in more plant and equipment when they are allowed to write the investments off in the first year rather than having to depreciate them over a decade or more.
Of course, nothing could be further from reality. The laws of supply and demand work just the same for capital and labor as they do for other commodities. Raise the price of a good and you will sell less of it. Lower its price and you will sell more of it. Therefore, firms can't maximize their revenue by simply raising their prices. They must optimize prices by finding the one unique price - not too high, not too low - that will lead to just the right amount of sales to maximize revenues.
The dynamic consequences of changes in tax rates, like any other price changes, ripple across all sectors of the economy. Raise taxes on labor, for example, and you lower workers' after-tax wages. Workers will work less at the prevailing wage, which means some or all of the higher revenues Krugman calculated will evaporate as fewer workers report to work. Moreover, firms must counteract or circumvent workers' reaction to higher labor taxes by paying them higher wages, substituting capital for labor to compensate for fewer workers willing to work at prevailing wages or by producing and selling fewer goods and services, probably some combination of all three.