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  • The Washington Post’s Weak Case for Ending the 2001/2003 Tax Cuts

    In yesterday’s Washington Post, Ruth Marcus uses “quack medicine” to describe conservatives’ support for extending the 2001 and 2003 tax cuts. Yet she commits her own economic malpractice.

    Ms. Marcus asserts that the tax cuts devastated tax revenues by pointing out that “tax revenue fell from 21 percent of GDP in fiscal 2000 to 17.5 percent in 2008. (I’m leaving out the recession-induced plunge, to under 15 percent this year and last.)”

    This cherry-picked data is highly misleading. Her starting point (2000) was a year in which revenues reached their post-war record due in part to an untenable stock market bubble. Her end point (2008) occurred during a recession that began in December 2007. 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.

    In reality, tax revenues since 1960 have remained close to their 18.0 percent of GDP average. The late 1990s boom and bubble were a temporary exception. 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. By 2007—the year before the current recession—healthy economic growth spurred in part by the tax cuts pushed revenues back up to 18.5 percent of GDP.

    The budget situation has certainly deteriorated. The $5.6 trillion surplus that had been originally projected for the 2002–2011 period has been replaced with an actual $6.1 trillion deficit. Yet Congressional Budget Office (CBO) data shows that the tax cuts caused just 14 percent of that swing. The vast majority of the fiscal decline was caused by surging spending (by both Presidents Bush and Obama) as well as the economic factors described above.

    Moving forward, 100 percent of the long-term rise in deficits is caused by rising spending. Even if all the 2001/2003 cuts are extended and the AMT is patched, the CBO still projects revenues to exceed its historical average of 18.0 percent of GDP by 2020. The deficit is projected to soar 6 percent of GDP above its historical average because spending will rise 6 percent of GDP above its historical average (according to a current policy baseline). Social Security, Medicare, Medicaid, and net interest costs are responsible for nearly all of this growth.

    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.

    Posted in Economics [slideshow_deploy]

    2 Responses to The Washington Post’s Weak Case for Ending the 2001/2003 Tax Cuts

    1. Joseph Eagar says:

      http://www.econlib.org/library/Enc1/GermanEconomi

      That link explains the origins of Reaganomics, which was first used (quite successfully) by Germany after World War Two.

      Reaganomics is a set of policies designed to deal with an inflationary crisis. The disinflationary monetary policies used to fight inflation reduces national incomes, employment and standard of living. Tax cuts, spending reductions and regulatory relief boost the national standard of living during the disinflationary adjustment, resulting in a shallower recession then would otherwise happen and strong growth afterwards (as seen in the strong 1980s/1990s growth here, and the German Economic Miracle). The budget cuts are especially important, as they shrink the trade deficit and increase the overall wealth of the economy (even if the short term effects aren't always pleasant).

      Unfortunately we've forgotten this. Deregulation and tax cuts were used to fight deflationary crises. In the absence of inflationary expectations the resulting budget deficits could only be paid for by a large trade deficit; with businesses increasingly using foreign capital to operate, American jobs started flowing out of the country.

      The truth is no one knows how to fight a deflationary crisis. Simply inverting Reaganomics won't work (somehow, I can't imagine printing money while raising taxes is a good idea). Traditional stimulus (both monetary and fiscal) do little other then degrade confidence in the government and the currency. The Fed is currently trying to induce hyperinflation to negate the hyperdeflationary forces in the global marketplace; so far it has slowed down–but not stopped–the deflationary spiral.

      I implore the Heritage Foundation to support conservative tax policy when it makes sense, and not in situations it was never designed for (Reagan himself raised taxes on occasion). These policies were never intended to fight bubble-induced deflationary recessions, and their misuse only leads to budget deficits, trade deficits, and jobs flowing out of America.

    2. Joseph Eagar says:

      . . .and the above comment should be taken as opposing any *new* tax cuts, but not as opposition to (or support for) extending those we already have. I'd rather not know what the opposite of Reaganomics do when fully implemented, thank you very much (as allowing those tax cuts to expire would do, since the Fed has printed money and Congress has reregulated, the only piece left is to tax raises).

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