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Tuesday, July 31, 2007

In a Surprise, a Republican is Using Scare Tactics Based upon Misleading Claims

In a thoroughly misleading article designed to scare people about what might happen to the economy because the Republicans did not have the courage to make the tax cuts they enacted permanent, GOP Senator John Kyl says:

Failing to extend the tax relief we have passed would result in a de facto tax hike that could cripple our economy...

But according to a recent CBO report:

CBO director Peter Orszag said, “The short-term effects of [the 2001 and 2003 tax cuts] in stimulating aggregate demand in the economy have largely dissipated by now, and the supply-side effects of those policies are uncertain but are probably small.”

Some of the tax cuts’ provisions “increased incentives for people to work and save (which can increase growth), but other provisions had no effect on incentives. In addition, the two tax laws increased the budget deficit, and doing so tends to reduce economic growth over the medium and long term. At this point in time (several years after enactment), once those various factors have been taken into account, the overall impact of the tax legislation on the economy is likely to be modest”

Thus, despite the scare tactics claiming otherwise, it won't "cripple our economy" if we allow the Republican's tax policy to be enacted exactly as written. There's simply no evidence that these tax cuts had a substantial impact on saving, investment, and growth.

Kyl also uses careful wording to describe tax cuts and deficit reduction:

The tax relief has helped produce an economy that has generated higher than expected tax revenues for the federal government. Tax receipts have risen 37 percent over the last three years and are projected to increase another 7 percent this year. These rising tax receipts have, in turn, helped drive down the deficit...

Though it makes it sound like the tax cuts reduced the deficit without actually saying so, i.e. the standard Laffer curve nonsense, as I hope you know by now that didn't happen (as noted above, "the two tax laws increased the budget deficit"). In fact, the supply-side impact of the tax cuts is estimated to be very small, so small that it generated very little tax revenue. From the CBO report:

the tax cuts’ indirect impact on economic growth, investment and saving and could affect this year’s budget deficit anywhere from an increase of $3 billion to a reduction of $14 billion...

The CBO report also points out that "without the tax cuts, the budget would probably be in surplus this year".

Thus, while there is evidence that leaving the Republican tax legislation exactly as they wrote it and allowing the tax cuts to expire will improve the government's fiscal position, there is no evidence that keeping the Republican tax legislation in place will cripple the economy as claimed.

    Posted by on Tuesday, July 31, 2007 at 12:33 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (18)

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