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

Posted By Brian Riedl On July 29, 2010 @ 10:55 am In Economics | Comments Disabled

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In yesterday’s Washington Post [2], 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 [3] 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 [4] 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.

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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 [6] 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 [5] 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.


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URL to article: http://blog.heritage.org/2010/07/29/the-washington-post%e2%80%99s-weak-case-for-ending-the-20012003-tax-cuts/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/WASHINGTON-POST.jpg

[2] Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2010/07/27/AR2010072704421.html?nav=emailpage

[3] tax revenue: http://www.whitehouse.gov/omb/budget/Historicals/

[4] post-war record: http://www.whitehouse.gov/omb/budget/fy2011/assets/hist01z3.xls

[5] Image: http://www.heritage.org/Research/Reports/2010/06/The-Three-Biggest-Myths-About-Tax-Cuts-and-the-Budget-Deficit

[6] 14 percent: http://online.wsj.com/article/SB10001424052748704738404575347302831199046.html?mod=WSJ_Opinion_LEADTop

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