Did the Bush tax cuts reduce revenue? Of course.
The Heritage Foundation's Brian Riedl accuses me of committing economic malpractice and cherry-picking data on a column that argued against permanently extending the Bush tax cuts. Okay, I’ll engage on that.
First, he says I picked “highly misleading” years to look at tax revenue as a percentage of GDP. (The context was Senate Minority Leader Mitch McConnell’s assertion that "there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy.") The first year I chose was 2000, and the reason was simple: it was the year before the tax cuts were enacted.
Riedl is correct that this was a post-World War II high. But since I was responding to McConnell’s assertion about the impact of the Bush tax cuts, that seemed the sensible place to start. And I ended with 2008 precisely to avoid the suggestion of cherry-picking. As I noted, the real recession-induced plunge has come in the last two years, with revenue falling below 15 percent of GDP.
Riedl notes that tax revenue has historically averaged 18 percent of GDP. Yes -- and in only three of the ten years the tax cuts have been in place has revenue exceeded that share. The average from 2000 to 2007 -- I’m being sporting here by lopping off the last two years, and including the year 2000 high point -- was 17.6 percent. By contrast, the average during the 1990's was 18.5 percent. Brian, who’s cherry-picking now?
Indeed, Riedl acknowledges, “Yes, the 2001/2003 tax cuts played some role in keeping revenues below their historical average for most of the 2000s, but the country was also recovering from a recession at that time, too.” This makes my point: that McConnell is wrong in contending “there’s no evidence whatsoever” that the tax cuts diminished revenue.
“To blame that entire revenue drop on the 2001/2003 tax cuts completely ignores the bursting of the stock market bubble as well as the recession,” Riedl says. But, of course, I did not blame the entire revenue drop on the tax cuts. I was simply responding to McConnell’s mischaracterization.
Some readers have pointed out, entirely accurately, that the gross amount of tax revenue rose in the aftermath of the tax cuts, although there was some decline through 2004. The government took in $2 trillion in 2000; $2.6 trillion in 2007. (I’m using Riedl’s preferred high-point year here.) This increase barely keeps up with inflation.
More important, to get back to McConnell’s assertion about the absence of evidence that the tax cuts “actually diminished revenue,” the point is: compared to what? The only logical benchmark is whether the tax cuts diminished revenue compared to what they would have been in the absence of any change, and here the answer is indisputable: the tax cuts did their intended job of returning money to taxpayers. The government took in less than it would have otherwise.
How do I know? Brian Riedl said so. Riedl found that the 2001 and 2003 tax cuts were responsible for “just 14 percent of the swing from the projected cumulative $5.6 trillion surplus for 2002-2011 to an actual $6.1 trillion deficit.”
How much is just 14 percent? Riedl did the math so I don’t have to: $1.7 trillion. Throw in other tax costs -- primarily the annual patching of the Alternative Minimum Tax, made more expensive by the existence of the Bush tax cuts -- and you get another $400 billion. Throw in the extra interest payments caused by the increased debt -- a cost Riedl conveniently omitted -- and you have $377 billion more.
Readers have also suggested that looking at the ratio of revenues to GDP is misguided because the entire theory of the tax cuts is that they would spur economic growth -- “the vibrancy of these tax cuts in the economy,” in McConnell’s phrase. That would be a fair argument -- if in fact the economy had grown at a better-than-expected rate. But it didn’t. As the Center on Budget and Policy Priorities has shown, “the 2001-2007 economic expansion was among the weakest since World War II with regard to overall economic growth.” Even singling out the boomiest years -- 2003-2007 -- growth in GDP was below average.
Riedl says that in arguing against a permanent extension of the tax cuts, I am putting blame in the wrong place. “As a deficit hawk, Marcus should focus on the actual source of rising long-term deficits -- rising entitlement spending -- rather than blame the tax cuts for a spending problem,” he concludes. Well, my column was about the Republican insistence that taxes cannot be allowed to go in any direction but down; I’ve spent plenty of ink lamenting the entitlement problem.
But even this year, with the economy struggling, the tax cuts account for one-fourth of the deficit, according to estimates by the Center on Budget and Policy Priorities. By 2019, when the economy will presumably have improved, the tax cuts will account for almost three-fifths of the projected deficit.
Meanwhile, Riedl makes the role of tax cuts in future deficits look smaller by assuming -- contrary to the standard practice of the Congressional Budget Office and the Office of Management and Budget -- that spending will grow with GDP rather than with inflation. If you build more spending into your assumptions, you’re going to find that spending is a bigger share of the problem.
Brian, have a cherry. They’re in season.
| August 2, 2010; 11:47 AM ET
Categories: Marcus | Tags: Ruth Marcus
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