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Tuesday, July 11, 2006

Tax Cuts Do Not Pay for Themselves

George Bush, as recently as today, made the claim that tax cuts pay for themselves. No credible analysis suggests that they do, but the administration continues to spin this yarn anyway. When will people finally tire of being deceived? The claim Bush made today is refuted by the White House's own analysis, yet the claims are made anyway. Here's the CBPP's quote of Bush's statement:

A Smoking Gun: President’s Claim That Tax Cuts Pay for Themselves Refuted by Administration’s Own Analysis, by James Horney, CBPP: In remarks on July 11 touting revised deficit projections in the Mid-Session Review of the Budget, President Bush once again claimed that tax cuts pay for themselves:

Some in Washington say we had to choose between cutting taxes and cutting the deficit….Today’s numbers show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring. That’s what has happened.

These remarks mirror previous statements by the President, the Vice-President, and key Congressional leaders that the increase in revenues in 2005 and the increase now projected for 2006 prove that tax cuts “pay for themselves”...

Another CBPP piece documents claims made by the administration that tax cuts are self-financing. David Wessel of the Wall Street Journal's Washington Wire summarizes the CBPP findings:

Do Tax Cuts Pay for Themselves?, by David Wessel, Washington Wire: Not if you read the fine print in the new White House midsession review of budget trends. “While difficult to estimate precisely,” Treasury long-run analyses of the effects of President Bush’s tax cuts “may ultimately” raise total national output of goods and services by 0.7%.

So is that enough to pay for the tax cuts, even after allowing them to work their economic magic over the next 10 years? The Center for Budget Policies and Priorities ... says it isn’t. “A 0.7 percent increase in the economic output that the Congressional Budget Office has projected for 2016 would represent an additional $146 billion [in gross domestic product],” it says. “If new revenues equaled as much as 20% of the additional output, the increase in revenues resulting from making the tax cuts permanent (assuming Treasury’s best-case assumptions) would be $29 billion.”

That’s a lot of money. But how does it compare to the size of the president’s tax cuts? The congressional Joint Committee on Taxation ... says making the president’s tax cuts permanent would reduce federal revenues in 2016 by $314 billion. That is more than 10 times what the Treasury analysis suggests tax cuts would generate by prompting more hours of work, more savings and investment and more efficient use of resources.

By the way,  according to the CBPP analysis, "An increase in the level of economic output of 0.7 percent — the Treasury’s best-case scenario — in 20 years would represent an increase of about 4/100ths of one percentage point in the annual growth rate of the economy."  That's 0.04% extra growth per year. For even more problems with the analysis, see Brad DeLong's post of Jason Furman's comments on dynamic scoring, the method used to evaluate the effect of tax cuts over time.

It's hard not to view this as anything but willful deception designed to sell an ideology. That deception is required to sell it tells you a lot about its validity. [Update: Brad DeLong has even more from Jason Furman echoing the CBPP analysis above].

    Posted by on Tuesday, July 11, 2006 at 04:15 PM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (14)

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