One More Time, All Together Now: Tax Cuts Do Not Pay For Themselves

The WSJ editorial page infers tax cuts pay for themselves even though everyone knows that isn't true:

Down Goes the Deficit, Editorial, WSJ: Red ink in Washington is invariably an excuse for raising taxes, so perhaps falling deficits should be a reason to cut them. The Bush Administration's midsession budget review, released yesterday, estimates that the deficit will have shrunk by more than 50% in three years...

Buoyant tax revenues are the major reason for this deficit reduction. ... Tax collections have been so resilient that many private forecasters and the Congressional Budget Office are predicting a budget deficit well under $200 billion by year's end. ...

The bright fiscal picture is especially impressive given that we have the fiscal burden of spending $173 billion this year to fight the war against terror in Afghanistan and Iraq. ...

In 2003, Mr. Bush and Congress cut taxes on investment and high earners, and the happy result has been revenues aplenty. ...

But The Center on Budget and Policy Priorities paints a very different picture:

Smaller Deficit Estimate No Surprise: New OMB Estimates Do Not Support Claims About Tax Cuts, by James Horney , CBPP: The Office of Management and Budget today released a report estimating that revenues for the current fiscal year will be higher, and the deficit lower, than the administration and the Congressional Budget Office projected five months ago. ... The administration and its supporters are portraying the new estimates as important evidence the President’s tax and budget policies are “working” by boosting the economy, generating more revenue, and improving the budget outlook.

Unfortunately, the reality is different. Careful analysis of the Mid-Session Review data and other data about the budget and the economy shows that:

• The increase in revenues and the reduction in the deficit, relative to what OMB projected in February, should be no great surprise. A CBO analysis demonstrates that over the last quarter century, relatively large reestimates of revenues and the deficit for the current fiscal year are the norm rather than the exception. The CBO data also indicate that at this point in the economic cycle — several years into an expansion — there is a clear tendency for mid-year reestimates to show an improvement in the budget outlook.
• The increase in estimated revenues in 2007 does not indicate that the 2001 and 2003 tax cuts are boosting the economy. To the contrary, the administration is now forecasting slower economic growth for the current year than it did in February. Furthermore, overall the performance of the economy since 2001 has not been especially robust; the current recovery has been weaker than the average economic recovery since the end of World War II.
• The recent increase in revenues has come largely in the form of increased corporate income taxes, taxes on high-income individuals, and taxes on capital gains. These increases reflect historically high corporate profits, increased concentration of income at the top of the income ladder, and high stock prices, rather than a surge in economic growth or wages. ...
• Revenue growth during the recovery has been disappointing rather than impressive. Even with the recent revenue increases, growth in revenues since 2001 has been far below average for comparable periods of previous business cycles since the end of World War II, which is exactly what one would expect, given the large tax cuts enacted in 2001 and 2003.
• Nor does the improvement in the deficit forecast for the current fiscal year indicate an improvement in the longer-term budget outlook. The Mid-Session Review itself does not show any improvement in the budget outlook for 2008 through 2012 compared to what was assumed in the President’s February budget (in fact, deficits are $137 billion higher)...
• Without the $300 billion cost of the 2001 and 2003 tax cuts in fiscal year 2007 alone, the $205 billion deficit projected in the Mid-Session for the current year would be a surplus. (Some supporters of the tax cuts would argue that this estimate of the cost of the tax cut is too high because it does not take into account the “dynamic” effects that the tax cuts have had on the economy, but the nonpartisan Congressional Research Service concluded last year that “at the current time, as the stimulus effects have faded and the effects of added debt service has grown, the 2001-2004 tax cuts are probably costing more than expected,” (emphasis added).[1]

There's quite a bit more detail at the CBPP.