Revised October 12, 2006

TAX CUTS: MYTHS AND REALITIES

Since 2001, the Administration and Congress have enacted a wide array of tax cuts, including reductions in individual income tax rates, repeal of the estate tax, and reductions in capital gains and dividend taxes. Nearly all of these tax cuts are scheduled to expire by the end of 2010. Making them permanent would cost more than $3 trillion over the next decade (when the cost of additional interest on the federal debt is included).

Because important decisions about these tax policies must be made in the next few years, it is essential to understand their effects on deficits, the economy, and the distribution of income. Supporters of the tax cuts have sometimes sought to bolster their case by understating the tax cuts’ costs, overstating their economic effects, or minimizing their regressivity. Here, we address some of the myths heard most frequently in recent tax-cut debates.



Tax Cuts and Deficits

Congressional Budget Office data show that the tax cuts have been the single largest contributor to the reemergence of substantial budget deficits in recent years. Legislation enacted since 2001 has added about $2.3 trillion to deficits between 2001 and 2006, with half of this deterioration in the budget due to the tax cuts (about a third was due to increases in security spending, and about a sixth to increases in domestic spending). Yet the President and some Congressional leaders decline to acknowledge the tax cuts’ role in the nation’s budget problems, falling back instead on the discredited nostrum that tax cuts “pay for themselves.”



Myth 1: Tax cuts “Pay for Themselves.”

“You cut taxes and the tax revenues increase.” — President Bush, February 8, 2006

“You have to pay for these tax cuts twice under these pay-go rules if you apply them, because these tax cuts pay for themselves.” — Senate Budget Committee Chair Judd Gregg, March 9, 2006

Reality: A study by the President’s own Treasury Department recently confirmed the common-sense view shared by economists across the political spectrum: cutting taxes decreases revenues.

Proponents of tax cuts often claim that “dynamic scoring” — that is, considering tax cuts’ economic effects when calculating their costs — would substantially lower the estimated cost of tax reductions, or even shrink it to zero. The argument is that tax cuts dramatically boost economic growth, which in turn boosts revenues by enough to offset the revenue loss from the tax cuts.

But when Treasury Department staff simulated the economic effects of extending the President’s tax cuts, they found that, if the tax cuts’ costs were not offset by spending reductions, then extending them would slightly decrease long-run economic growth. As a result, the tax cuts would cost slightly more than otherwise expected. If financed by spending cuts, the Treasury study found the tax cuts would have modest positive effects on the economy, which would pay for at most 10 percent of the tax cuts’ total cost. (The tax cuts have so far been financed by deficits, and supporters have offered no proposals to offset the cost of extending them.)

The claim that tax cuts pay for themselves had already been rejected by the Administration’s own leading economists. Edward Lazear, the current chair of President’s Bush’s Council of Economic Advisers, recently stated, “I certainly would not claim that tax cuts pay for themselves.” N. Gregory Mankiw, President’s Bush’s former CEA chair and a well-known Harvard economics professor, has written that there is “no credible evidence” that “tax revenues… rise in the face of lower tax rates.” Mankiw compared an economist who says that tax cuts pay for themselves to a “snake oil salesman trying to sell a miracle cure.”

The claim that tax cuts pay for themselves also is contradicted by the historical record. In 1981, Congress substantially lowered marginal income-tax rates on the well off, while in 1990 and 1993, Congress raised marginal rates on the well off. The economy grew at virtually the same rate in the 1990s as in the 1980s (adjusted for inflation and population growth), but revenues grew about twice as fast in the 1990s, when tax rates were increased, as in the 1980s, when tax rates were cut. During the current recovery (with its tax cuts), the economy has grown at about the same pace as during the equivalent period of the 1990s business cycle, but revenues have grown far more slowly.

Myth 2: Even if the tax cuts reduced revenues initially, they boosted revenues and lowered deficits in 2005 and 2006.

“Some in Washington say we had to choose between cutting taxes and cutting the deficit… Today’s numbers [the updated 2006 budget projections] show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring.” — President Bush, July 11, 2006

Reality: Strong revenue growth in 2005 and 2006 has not made up for extraordinarily weak revenue growth over the previous few years.

When discussing revenue growth since the enactment of the tax cuts, Administration officials typically focus only on revenue growth since 2004. This provides a “convenient” starting point for their arguments, as it sets a very low bar. Measured as a share of the economy, revenues in 2004 were at their lowest level since 1959. Given this historically low starting point, it is not surprising that revenues have recovered since then. Supporters of the tax cuts selectively cite revenue growth over just the past two years to argue that the tax cuts are fueling increases in revenues.

Even taking into account the growth in revenues in fiscal year 2006, total revenue growth over the current business cycle as a whole has still been negative, after adjusting for inflation and population growth. (The current business cycle began in March 2001, when the last business cycle hit its peak and thereby came to an end.) In other words, the current revenue “surge” is merely restoring revenues to where they were half a decade ago. In contrast, five and a half years after the peak of previous post-World War II business cycles, real per-capita revenues had increased by an average of 10 percent, and in the 1990s, real per-capita revenues were up 11 percent. Revenues in 2006 are still more than $200 billion short of where they would have been had they grown at the rates typical in other recoveries.

more propoganda. Funny you never post where you get your articles from.

So you can honestly say that money in your pocket is better spent by the Government. You are an asshat. If you think higher taxes are better then just a right a check every couple of weeks so you can feel better.

Oh and by the way. You have not had one original thought or have articulated on anything you have posted. It's just an article and that is that. Whats wrong. Are you afraid to debate actually i think the better question is are you able to debate. Telling from what you have posted since you have joined the ansewr is no.

Just post an article from gon knows where and run away

Corporation tax revenue is up.
Individual tax revenue is up.

I believe this was the case under both Reagan and JFK as well when they cut the taxes.

The problem is not in the tax revenue, it is in the spending.

If you want fairness in taxes, get rid of this dinosaur we presently have today and go with the flat tax....

__________________
"A committee is a group of people who individually can do nothing but together can decide that nothing can be done."
Fred Allen

"A government that robs Peter to pay Paul can always depend on the support of Paul."
George Bernard Shaw

"Politics is the art of choosing between the disastrous and the unpalatable."
John Galbraith

Why do tax cuts need to be paid for? What does that mean?