In some conservative circles, the idea that tax cuts can pay for themselves through stronger economic growth is popular, despite having been discredited. Intellectually-honest Republicans will acknowledge that the idea is bizarre, and has even been rejected by the president’s own economic advisors. But that, of course, won’t stop Dick Cheney. Consider, for example, the VP’s ideas about government revenue, which he shared late last week at the Conservative Political Action Conference.
Cheney touted President Bush’s recently announced proposal to create a tax analysis division as a move toward providing more evidence for the administration’s side of the argument.
“The president’s tax policies have strengthened the economy, as we knew they would,” Cheney told the conference, according to a text posted on the White House’s Web site. “And despite forecasts to the contrary, the tax cuts have translated into higher federal revenues.”
Cheney said some forecasters have underestimated the degree to which tax cuts would stimulate economic growth and tax revenue.
“It’s time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy,” Cheney said, explaining why Bush has proposed the new Treasury Department division. “The evidence is in, it’s time for everyone to admit that sensible tax cuts increase economic growth and add to the federal treasury.”
To hear the vice president repeat such nonsense is disconcerting. The theory, in a nutshell, is that tax cuts can’t lead to deficits because they pay for themselves — tax cuts grow the economy, which leads to wealthier people, which leads to more tax receipts. Under this approach, we can cut taxes all we want and it won’t affect the deficit at all. (Bush publicly embraced a similar approach in April 2003.)
No wonder these guys have added a few trillion dollars to the debt over five years; they have no idea what they’re talking about.
First, Bush’s huge tax cuts are responsible for the largest budget deficits in American history. If Cheney were right, federal spending would be exclusively responsible for the annual budget shortfalls. This is demonstrably false.
Second, even the White House’s own budget projections don’t expect Bush’s tax cuts to pay for themselves through stronger growth. As the Center on Budget and Policy Priorities explained, “To the contrary, the budget projects that under the President’s policies, federal revenues will grow at a slower annual rate between 2001 and 2008 than in any comparable period over the last five decades…. In addition, the budget projects that under Bush policies, the budget will be in deficit every year for the next 50 years.”
And third, economist N. Gregory Mankiw, Bush’s hand-picked chairman of the White House Council of Economic Advisors, has for years argued against the idea that tax cuts can pay for themselves.
In Mankiw’s textbook, “Principles of Economics,” the economist said when the Reagan administration tried this approach in the 1980s, it was an example of “fad economics” and came after the administration relied on the advice of “charlatans and cranks.”
Unfortunately for all of us, the charlatans and cranks are back, and they haven’t learned from their mistakes.