Budget Nonsense from the White House

The Bush administration has spent much of the past two days claiming that the tax cuts are responsible for the recent surge in government revenues.

But this is nonsense. The fact that government tax collections are rising during a time of economic growth is, at the very least, unsurprising. If the White House wants to take credit for a falling budget deficit, then they need to make the only comparison that really matters, and one that they have been studiously avoiding: what is today’s budget deficit compared to what it would have been without the Bush tax cuts?

Since they’re unwilling to do so, let’s make that comparison for them. In fact, since I’m in a generous mood today, let’s suppose for a moment that we gloss over a host of theoretical problems with the argument of the supply-siders (e.g. their evidence-free assumption that substitution effects of tax cuts outweigh income effects) and buy their dubious argument that the tax cuts caused supply-side economic growth.

Even with such supply-side optimism, the budget deficit today is much higher than it would have been without Bush administration tax policies.

In January of 2003 the Republican Congress stipulated that its own tax specialists, the Joint Committee for Taxation (JCT), must prepare “dynamic” analyses of all tax legislation – i.e. analyses that include supply-side gains that may reduce the tax burden of any tax cut. We can use these estimates to get at the supply-siders’ best-case scenario for the effect of the Bush tax cuts on the budget deficit.

In December 2003 the JCT estimated that when supply-side macroeconomic effects of the 2003 tax cuts were taken into consideration, the tax cuts would indeed cause an offsetting revenue gain by stimulating economic activity. However, they estimated that the positive supply-side effects on the economy would boost real GDP growth by only 0.2-0.3% per year during 2003-08. They then estimated that this benefit to the economy would mean that the revenue losses from the tax cut were estimated to be only around 75-90% of what they would otherwise be.

The following chart shows what this means for the budget deficit. The blue bars show the Bush administration’s most recent budget deficit forecast – the one that they were crowing about today. The orange bars show the budget forecast if the Bush tax cuts had never happened, according to the estimates by the Congressional Budget Office, calculated by simply summing the CBO’s estimates of the revenue effects of each of the Bush tax cuts. The purple bars show what the budget deficit would have been without the Bush tax cuts, even if you believe the supply-siders and use the JCT’s “dynamic scoring”, which assumes that without the tax cuts the economy would have grown more slowly.

The White House is proud of the fact that their tax policies have caused the budget deficit forecasts to improve, so that this year’s deficit will be only $333 billion. Yet without their misguided tax cuts, the budget deficit today would be in the neighborhood of $100 billion instead, and heading toward balance within another two years.

Kash