Bush Lie #48176: These Tax Cuts Pay for Themselves

As you read this snippet from the Center on Budget Policy and Priorities on the great lie of Mr. Bush's budget-breaking billionaire tax cuts, consider the previous post taken from The Times of London that asserts that if the U.S. isn't bankrupt already, it very well soon will be.

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.

President Bush, for example, commented on July 11, “Some in Washington say we had to choose between cutting taxes and cutting the deficit…. that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring.”[1] Earlier, in a February speech the President stated, “You cut taxes and the tax revenues increase.”[2] Similarly, Vice President Cheney has claimed, “it’s time for everyone to admit that sensible tax cuts increase economic growth and add to the federal treasury.” [3] And Majority Leader Frist has written that recent experience demonstrates, “when done right, [tax cuts] actually result in more money for government.”[4]

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.