Friday, October 13, 2006

Tax Cuts Reduced the Budget Deficit!

No, it's not surprising. In fact, it has happened many times already. But I can't help it - I still feel slightly astonished every time that President Bush claims, with a straight face, that the budget deficit is as "low" as it is because of his tax cuts.

He repeated this assertion in his comments about Wednesday's news that the US federal budget deficit for 2006 was only $425 billion or so - or about $250bn once the Social Security trust fund surplus is used to make up part of the deficit.

The tax cuts may indeed have stimulated some economic growth. In 2003 the Republican Congress convened a panel of economists (under the authority of the Joint Committee on Taxation, or JCT) to estimate exactly how much of a positive impact on tax revenues this feedback effect would provide, using a technique called "dynamic scoring" to measure the overall cost of the tax cuts.

This JCT study concluded that there would indeed be positive revenue effects from the economic growth that the tax cuts would stimulate, to the tune of some $30 or $40bn per year. But it turns out that the negative revenue effects of the tax cuts are a bit larger than that. The following picture illustrates.

Maybe it's a little hard to tell from the graph. But looking at the raw data, it seems quite obvious to me that the negative revenue effects of the tax cuts are a fair bit larger than the positive feedback effects from higher economic growth.

What does this mean? Quite simply, it means that if the tax cuts had never happened, then the "low" budget deficit of $425 billion in 2006 ($250bn if you include the SS surplus) would have actually been only about $240 billion ($70 bn if you include the SS surplus). And in general, the somewhat grim fiscal future that the US would have been facing if taxes had not been cut has been turned in to a truly terrifying picture of fiscal irresponsibility.

Yes, that's right, right now we can look forward to General Fund deficits growing from $400 to $500 to $600 to $700 to $800 billion per year. (That assumes that President Bush gets his wish list of tax cut extensions and AMT reform.)

Enjoy today's relatively good budget news. Because it won't last.


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