True or False: Tax cuts increase GDP and improve the Balance of Trade. (Explain)?

It is an axiom in the neoliberal textbook.





As it is true with many basic truths in economy, they were formed when capital was scarce. Let me explain:





Once upon a time the limiting factor for the growth of economy was availability of capital for investments. Capital, that is, industrial capuital has the following structure:





Fixed capital (that is the money locked in property, buildings and machinery)


Variable capital (The part invested in raw materials, working force and other operative costs)


Profit





As the fixed capital is unreachable without selling the factory and the variable part is necessary to resume production, the only part available for investmens is profiit. But many predators scavenge on profit.





The owner must live on it (and his tastes can be quite expensive)


Some of the taxes have already been incorporated in the cost of work, but many are burdening profit. In fact the state is the main rival to the owner around the question how to invest profit.





So you can see, basically, the lower the taxes are, the higher the growth of economy.





But there comes a catch: This only works on the premises that the owner will invest money rationally and that the investments that bring the biggest benefit to the community will also be the most profitable.





Both these premises are wrong. The owner may not invest rationally, he may invest greedily. This happens when somebody invests in something that brings big short-term profits and a lot of long-term damage left to others to deal with.





And it is clearly visible that often the most profitable investments are the ones that do the most harm (i.e. war technology and drugs).





That is why the neoliberalist assumptions, although basically correct and sound, don't always hold water in modern society.





The situation today is still worse because there is a surplus of capital that is constantly seeking the greatest profits. Thus states must decrease taxes and other costs to big capital and offer other bonuses as downcuts of workers rights, just to prevent the capital from fleeing their country. Basically, this is not a free market anymore, this is a blackmail. And the neoliberal claim that lower taxes make greater economical growth is one of the main threats in this game of blackmailing.