Haines: Tax Cuts Do Contribute to Nation's Deficit

I was very encouraged to read an article last Tuesday in the Wall Street Journal entitled “Voters Back Tough Steps to Reduce Budget Deficit.” What is discouraging is that some people, mostly Republican politicians, are trying to convince people that tax cuts do not contribute to the deficit. This is not only misinformation, it is dangerous misinformation.

The misinformers’ claim is that tax cuts pay for themselves and thus do not impact the deficit negatively. They claim that lower tax rates stimulate the economy and job growth so much that you wind up with more tax revenues at lower rates than you do at higher rates. While President Bush was telling the public that tax cuts pay for themselves, his 2003 Economic Report of the President, pages 57-58, told a very different story:

"Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."

If the President’s own report is not convincing, here’s a sampling of leading economists’ opinions, all of whom have impeccable Republican and/or conservative credentials:

Greg Mankiw, Harvard economics professor, visiting fellow at the American Enterprise Institute, was chairman of George Bush’s Council of Economic Advisers wrote in his blog: “I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.”

Martin Feldstein, a Harvard economist, chairman of President Reagan’s Council of Economic Advisers and adviser to John McCain’s 2008 campaign, quoted in a New York Times article: “It is not that you get more revenue by lowering tax rates, it is that you don’t lose as much.”

Andrew Samwick was chief economist to the Bush CEA, and is now at Dartmouth. He wrote the following New Year’s message to his former colleagues in the Bush White House: “You are smart people. You know that the tax cuts have not fueled record revenues … You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.”

Alan Viard, a former Bush White House Economist, said in a Washington Post article: "Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that.”

Robert Carroll, deputy assistant Treasury secretary for tax analysis, said in that same Washington Post article, "As a matter of principle, we do not think tax cuts pay for themselves."

Ed Lazear, chief economic adviser to President Bush and a member of Bush’s Tax reform advisory panel, was quoted in the Washington Times: "We do not say the tax cuts pay for themselves."

Henry Paulson, Bush’s Treasury Secretary, at his confirmation hearing in the Senate: "As a general rule, I don't believe that tax cuts pay for themselves."

David Stockman, director of OMB for President Reagan, wrote in a recent NY Times Op-Ed: "The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts."

And finally, the nonpartisan Congressional Budget Office’s Budget Outlook, January 2007:
"The expiration of tax provisions as scheduled has a substantial impact on CBO’s projections, especially beyond 2010 when a number of revenue-reducing tax provisions enacted in the past several years are slated to expire. Some of those provisions were enacted many years ago and have been routinely extended. Almost all of the expiring provisions reduce revenues. If the expiring provisions were extended rather than allowed to expire, future revenues would be significantly lower than under the baseline projections that assume current law."

You can argue the deficit battle must wait until the economy is on more solid footing, but you cannot argue that the tax debate does not have significant impact on the deficit.

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