Tax cuts increase deficits according to studies by CBO, Treasury, and Harvard.
By Daniel at 27 January, 2010, 10:52 am
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
The incremental growth is not enough to offset the hit to the deficit.
1) The CBO estimates the Bush tax cuts cost the Treasury about $1.8 trillion over 10 years. See http://www.cbo.gov/ftpdocs/78xx/doc7878/03-21-PresidentsBudget.pdf on page 6.
2) During 2003, over 450 economists, including 10 Nobel laureates, argued against the Bush 43 tax cuts. Their letter stated: “Passing these tax cuts will worsen the long-term budget outlook, adding to the nation’s projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.”
3) The Washington Post editorial board summarized other CBO, Harvard, and Treasury studies (some of them completed by conservative economists) that indicated tax cuts increase deficits. See http://www.washingtonpost.com/wp-dyn/content/article/2007/01/05/AR2007010501801.html
4) In November 2009, The Economist estimated the additional federal tax revenue generated from eliminating certain tax deductions, for the 2013-2014 period. These included: employer-provided health insurance ($215 billion), mortgage interest ($147B), state & local taxes ($65B), capital gains on homes ($60B), property taxes ($33B) and municipal bond interest ($37B). These total $552 billion. A fuel tax of $0.50 cents per gallon would raise another $62 billion. This would reduce the projected deficit at that time by half.
http://www.economist.com/displaystory.cfm?story_id=14903024
Here is an intuitive way to think about this: Historically, the U.S. federal government collects about 18% of GDP in tax revenue. Let’s round that to 20% to make this simpler. This means that a $1.00 of stimulus (tax cuts or spending) would have to generate $5.00 of incremental GDP to create the $1.00 increase in taxes necessary to offset the impact of the stimulus measure on the deficit. Economists estimate the impact of $1.00 of stimulus (tax cuts or spending) on GDP of between $0 and $3.00, depending on the study and nation involved. Economists refer to this as a “multiplier” effect between 0 and 3.0, meaning that $1.00 of stimulus would create between $0 and $3.00 of incremental GDP. With U.S. tax collections around 20% of GDP, such multipliers do not hit the 5.0 threshold required to generate sufficient economic activity to be deficit neutral; the deficit goes up. In a country where tax collection is 33% of GDP, the multiplier required to achieve deficit neutrality would be 3.0.
- David Doney
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
No comments yet.