Bush Tax Cut versus revenue decline: McConnell Kentucky windage

“Even under favorable assumptions, the tax cuts would generate added growth that would offset no more than 10 percent of their long-term costs.””

“Ten Myths About the Bush Tax Cuts-and the Facts

Myth #1: Tax revenues remain low.
Fact: Tax revenues are above the historical average, even after the tax cuts.

Myth #2: The Bush tax cuts substantially reduced 2006 revenues and expanded the budget deficit.
Fact: Nearly all of the 2006 budget deficit resulted from additional spending above the baseline.

Myth #3: Supply-side economics assumes that all tax cuts immediately pay for themselves.
Fact: It assumes replenishment of some but not necessarily all lost revenues.

Myth #4: Capital gains tax cuts do not pay for themselves.
Fact: Capital gains tax revenues doubled following the 2003 tax cut.

Myth #5: The Bush tax cuts are to blame for the projected long-term budget deficits.
Fact: Projections show that entitlement costs will dwarf the projected large revenue increases.

Myth #6: Raising tax rates is the best way to raise revenue.
Fact: Tax revenues correlate with economic growth, not tax rates.

Myth #7: Reversing the upper-income tax cuts would raise substantial revenues.
Fact: The low-income tax cuts reduced revenues the most.

Myth #8: Tax cuts help the economy by "putting money in people's pockets."
Fact: Pro-growth tax cuts support incentives for productive behavior.

Myth #9: The Bush tax cuts have not helped the economy.
Fact: The economy responded strongly to the 2003 tax cuts.

Myth #10: The Bush tax cuts were tilted toward the rich.
Fact: The rich are now shouldering even more of the income tax burden.”

“Claim That Tax Cuts "Pay For Themselves" Is Too Good To Be True
Data Show No "Free Lunch" Here

By Aviva Aron-Dine and Richard Kogan

Revised July 26, 2006

Key Findings

• Despite recent statements by the President (Bush), Vice President (Cheney), and certain Congressional leaders that tax cuts pay for themselves, economists from across the political spectrum — including the Administration’s current and former chief economists — reject this notion.

• Further, the Treasury Department’s own analysis of the President’s tax cuts confirms common sense and conventional wisdom; it concludes that, even under favorable assumptions, the tax cuts would generate added growth that would offset no more than 10 percent of their long-term costs.

• During the current business cycle, both revenues and the economy have been weaker than in the typical post-World War II business cycle. Even taking into account the stronger revenue growth OMB now projects for 2006, real per-capita revenues have simply returned to the level they reached more than five years ago when the current business cycle began in March 2001. In previous post-World War II business cycles, real per-capita revenues have grown by an average of about 10 percent over the first 5 ½ years of the cycle.

• Revenues grew much more quickly in the 1990s, when taxes were raised, than in the 1980s, when taxes were cut. Revenues in the current decade, with its large tax cuts, are also expected to grow much more slowly. Based on the Administration’s own projections of revenue growth through the end of the decade, revenues in the current decade will grow at less than one fourth their growth rate in the 1990s.

In recent statements, the President, the Vice President, and key Congressional leaders have asserted that the increase in revenues in 2005 and the increase now projected for 2006 prove that tax cuts “pay for themselves.” In other words, the economy expands so much as a result of tax cuts that it produces the same level of revenue as it would have without the tax cuts.”

“In fact, however, the evidence tells a very different story: the tax cuts have not paid for themselves, and economic growth and revenue growth over the course of the recovery have not been particularly strong.

·         Even taking into account the stronger revenue growth now projected for fiscal year 2006, real per-capita revenues have simply returned to the level they reached more than five years ago, when the current business cycle began in March 2001.  (March 2001 was the peak and thus the end of the previous business cycle, and hence also the start of the current business cycle.)  In contrast, in previous post-World War II business cycles, real per-capita revenues have grown an average of about 10 percent over the five and a half years following the previous business-cycle peak.[5]  By this stage in the 1990s business cycle, real per-capita revenues had increased by 11 percent.

·         Overall, this economic recovery has been slightly weaker than the average post-World War II recovery.  In particular, GDP growth and investment growth have been below the historical average, despite recent tax cuts specifically targeted at increasing investment. 

Those who claim that tax cuts pay for themselves might argue that stronger revenue growth in 2005 and 2006 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.

·         In 1981, Congress approved very large supply-side tax cuts, dramatically lowering marginal income-tax rates.  In 1990 and 1993, by contrast, Congress raised marginal income-tax rates on the well off.  Despite the very different tax policies followed during these two decades, there was virtually no difference in real per-person economic growth in the 1980s and 1990s.  Real per-person revenues, however, grew about twice as quickly in the 1990s, when taxes were increased, as in the 1980s, when taxes were cut.  (See Figure 1.)

·         Even the Administration does not project that revenues will continue to grow at their recent rates or that the tax cuts will pay for themselves.  Under the revenue assumptions in the Office of Management and Budget’s Mid-Session Review, real per-person revenues will grow at an annual average rate of just 0.8 percent between 2000 and 2011, only about half the growth rate during the 1980s and less than one-fourth the growth rate during the 1990s.

·         Studies by the Congressional Budget Office, the Joint Committee on Taxation, and the Administration itself show that tax cuts do not come anywhere close to paying for themselves over the long term.  CBO and Joint Tax Committee studies find that, if financed by government borrowing, tax cuts are more likely to harm than to help the economy over the long run, and consequently would cost more than conventional estimates indicate, rather than less.  Moreover, in its recent “dynamic analysis” of the impact of making the President’s tax cuts permanent, the Treasury Department reported that even under favorable assumptions, extending the tax cuts would have only a small effect on economic output.  That small positive economic impact would offset no more than 10 percent of the tax cuts’ cost.”

“McConnell: 'No evidence whatsoever that the Bush tax cuts actually diminished revenue'

There are fiscal theories that I disagree with, and that I think are cruel, and that make me upset. But very few actually make me sad. Sen. Mitch McConnell, however, hit my sore spot today. "There's no evidence whatsoever that the Bush tax cuts actually diminished revenue," he told Brian Beutler of TPMDC. "They increased revenue because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject." In other words, this is why Republicans don't think tax cuts need to be paid for. They pay for themselves.

Why does this make me sad? Because it's hard to see the country prospering when one of its two major political parties is this economically illiterate. McConnell isn't some backbencher. He's Senate minority leader. And he thinks there's "no evidence whatsoever that the Bush tax cuts actually diminished revenue."

There's an ontological question here about what, exactly, McConnell considers to be "evidence." But how about the Congressional Budget Office's estimations? "The new CBO data show that changes in law enacted since January 2001 increased the deficit by $539 billion in 2005. In the absence of such legislation, the nation would have a surplus this year. Tax cuts account for almost half — 48 percent — of this $539 billion in increased costs." How about the Committee for a Responsible Federal Budget? Their budget calculator shows that the tax cuts will cost $3.28 trillion between 2011 and 2018. How about George W. Bush's CEA chair, Greg Mankiw, who used the term "charlatans and cranks" for people who believed that "broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue." He continued: "I did not find such a claim credible, based on the available evidence. I never have, and I still don't."”