The tax cuts don’t ‘pay for themselves’

March 9, 2006

Just a couple of weeks ago, Dick Cheney argued that it’s silly to believe tax cuts could add to the budget deficit because when the government cuts taxes, the economy grows, and people end up paying more in taxes. The cuts, Cheney said, pay for themselves. It’s a popular sentiment in GOP circles — Bush believes it, as do Bill Frist and Tom DeLay.

It really shouldn’t be necessary, but I’m glad to see the Center on Budget and Policy Priorities take the time to debunk this nonsense.

[T]he evidence tells a very different story: the tax cuts have not paid for themselves, recent economic growth and revenue growth have not been particularly strong, and revenues remain lower than had been predicted before the tax cuts were enacted. […]

Those who claim that tax cuts pay for themselves might argue that 2005’s stronger revenue growth represents the beginning of a new trend, and that the tax cuts could pay for themselves over the longer term. Neither the historical record nor current revenue projections support this argument.

The CBPP goes into quite a bit of detail, complete with reality-based graphs, to explain why the Republican notion of a “free lunch” is bunk. It’s worth bookmarking for the next time it’s added to the GOP talking points. If recent history is any guide, we shouldn’t have to wait too long.

Next you’re going to tell us that the Earth is spherical and that it orbits the Sun. Ha, ha, ha! You’re a card, CB.

  • Dick Cheney, as we all know, is perfectly happy to lie to his base to keep them in line. He knows perfectly well that we have passed the point of tax rate reductions that will generate enough new revenue to pay for themselves and gotten to the point of reductions that create permenant systemic deficits. There is a curve, and we are way beyond it.

    Which explains why former treasury secretary Robert Rubin blew off the White House and Bush’s personal appeal to join his entitlements commission and rather suggested a commission to fix the long term fiscal problem of this country.

  • Or perhaps like a pyramid scheme..” trust us with investing your money and eventually we’ll all become rich”.. (and please don’t be troubled by the mathematical certainy that the pyramid will collapse well before all but the insiders are payed off). They aren’t called neo-CONS for nothing.

  • Great. Now if only the main stream media would actually report on the findings of groups like the CBPP, without purposefully making it all sound like a lot of economics mumbo jumbo, then your average American wouldn’t go right on believing tax cuts pay for themselves.

    Until then, the CBPP can debunk as many Republican falsehoods as they can, but it’s not going to make anyone stop lying about it.

    Man, politics is depressing sometimes…

  • It’s worth bookmarking for the next time it’s added to the GOP talking points.

    in my experience it doesn’t really do any good – you bring this up and they immediately attack the “bias” of a group like the CBPB. The “true believers” will only believed the approved sources that their handlers at Fox News and the likes of Hannity and O’Reilly pre-approve for them.

  • It all goes back to Reagan. Conservatives are convinced that the economy during the 1980s took off once Reagn cut back taxes when he took office. Of course, these cuts would be followed by significant tax increases in 1982 and 1983,. That little fact seems to be missing from many of their arguments, for some reason.

  • It is amazing to me, inspite of everything I know about conservatives, that they continue to believe this horseshit. In the 25 years since Reagaon pulled this fast one on the American public, the evidence uniformly contradicts the idea that cutting taxes increases governement revenue. In fact, when the government raised taxes (Bush I late in his administration and Clinton early in his), revenue climbed and the defecit became a surplus. Then we get Bush II who cuts taxes and, voila, here is the deficit again, bigger and badder than ever.

    There are a variety of reasons why the “cutting taxes increases revenue” is horseshit, but one of the main reasons has to do with the relationship between interest rates and the defecit. If you cut taxes too much, it drives interest rates up. This has a double whammy on the defecit by reducing revenue and driving up the cost of debt service. When you raise taxes it allows the Fed to cut interest rates, which allows the economy to grow faster at the same time that it reduces the cost of debt service.

    All the evidence of 25 years is that, at least at moderate marginal tax rates such as in the US, that the influence on the economy of interest rates dwarfs that of tax rates.

  • Why is it that cutting taxes, having the economy grow, and people paying MORE TAXES! is alright with wing-nuts? Doesn’t this ultimately defeat the underlying theory of the tax cut in the first place (at least from a personal level)? I had always thought that the conservative theory was to cut taxes and also cut spending. The second half of that equation never gets mentioned anymore (not that I’m advocating it, but the hypocracy is staggering).

  • The article posted by bogie (written by a conservative columnist using information from a group that supports cutting capital gains taxes) seems to contradict with the points made by the report CB posted:

    In its most recent Budget and Economic Outlook report issued in late January, 2006, CBO revised upward its estimates of capital-gains revenues over the 2003-2005 period. Some have cited this CBO reestimate as evidence that capital-gains tax cuts, if not other tax cuts, pay for themselves. But more careful scrutiny shows that this narrower claim is seriously flawed as well.

    •CBO noted that it has raised its estimate of capital-gains revenues based on information showing higher-than-expected capital-gains realizations. Describing this reestimate as a “technical revision,” CBO explains that capital-gains realizations have been above historical levels (relative to GDP and the capital-gains tax rate) over the past few years but that it does not expect this trend to continue. The effect of the lower capital gains tax rates on CBO’s reestimates of realizations was minor.

    •The higher capital-gains revenues could not have resulted from higher-than projected economic growth, because actual growth in 2004 and 2005 was slightly lower than CBO had projected in January 2004.

    •The higher capital-gains realizations do reflect, in part, the rise in the stock market in 2003, which rebounded after three consecutive down years. Capital-gains realizations and revenues tend to go up and down with the market. But a recent study by three Federal Reserve economists demonstrates that the capital-gains and dividend tax cuts of 2003 were not the reason that the market went up that year.

  • So, the economy has grown, tax revenue has grown at a rate 4X CPI, but because you try to relate the growth to past recoveries that somehow means the tax cuts didn’t produce growth?

    The strength of a recovery is in large part a function of the depth of the recession from which we recover. The ’01 recession was a blip relative to past recessions and the depression. This time around the tax cuts were passed and went into effect early – thus softening the blow. If unemployment peaks at 6% rather than twice that, then whatever the stimulus there’s not going to be the same amount of job creation – simply put, there are fewer people who need a job.

    Moreover comparing the 1980s to the 1990s and the present is silly – the better comparison is all three decades together versus the 1950s through 1970s. That’s right – you can’t look at the 1950s and 1960s without the 1970s. You can’t just compare economic performance without regard to Fed policy, which was far looser in the 1990s than in the 1980s or even today. The only real capital is earnings – accumulated and current. The income tax takes earnings away. The issue isn’t so much incentive – will you work as hard if the government’s going to take 91%, or 70%, of the income away. It’s capital – if prior years’ earnings were taxed away at 91%, or 70%, then there isn’t as much capital to reinvest, thus creating more growth, more earnings, more tax revenue. For a while you can compensate for that through loose monetary policy and that also skews your comparisons.

    How about comparing growth, unemployment and tax revenue at the peak of the interest rate cycles? We still have unemployment at 4.6%, and tax revenue is still growing at 4X CPI, at the peak of the present interest rate cycle.

  • By the way Shargash, you’re an idiot posting factual assertions that are false.

    Bush ’41 did raise tax rates.

    And, adjusted for inflation, federal revenue FELL by over 2%.

  • There is a valid point to be made that just because revenue increased doesn’t mean the tax cuts – by allowing the economy to reinvest its own earnings – caused the tax revenue increase.

    The question is whether tax revenue increased “all other things being equal.”

    All other things are never equal – so how do we answer this question?

    The CBO answers it for us – the CBO projects tax revenue considering “all other things” – or tries to.

    It might miss some of those “other things” or “other things” might happen that the CBO didn’t expect to happen – but if the tax revenue exceeds the CBO forecast, indeed if it does so by tens of billions of dollars per year, and by an annually-increasing amount, then that would seem to be the proof in the pudding.

    And indeed, in Krugman’s 7/11/05 piece, he seemed to indicate approval of this test, when he hung his entire argument that the tax cuts had not to-date paid for themselves on the notion that to-date tax revenues had not outpaced the CBO projection.

    Well, now we have a different story – over the last 4 years tax revenue has outpaced CBO forecasts by over $430BN – by $160BN for fiscal 2007.

    Paul Krugman cannot now back off the test he laid out two and a half years ago.

    When you say “A is not true because X isn’t true” then you have to be ready to stand up when X becomes true and admit that A is also true – not come up with a new Y, and then a Z…..

    I’m not holding my breath though……

    Krugman still hasn’t admitted he was wrong about the chads….

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