Taking Credit Where Little is Due

In this post the other day I predicted that President Bush would claim credit for the decline in the budget deficit and argue it was due to his tax cuts. Well, here is a Washington Post article where Bush did exactly that. Fortunately the WaPo also debunks Bush’s claims.

Economists said Bush was claiming credit where little is due. The economy has grown and tax receipts have risen at historic rates over the past two years, but the Bush tax cuts played a small role in that process, they said, and cost the Treasury more in lost taxes than it gained from the resulting economic stimulus.

I know, I know, many of those on the Right who aren’t particularly enthralled with things like data and and economic thoery will argue to the contrary. However, this view fits in quite nicely with N. Gregory Mankiw’s research on this topic. Who is N. Gregory Mankiw? The former head of President Bush’s Council of Economic Advisors. Basically, the idea that the tax cuts can “pay for themselves” is just not true.

“Federal revenue is lower today than it would have been without the tax cuts. There’s really no dispute among economists about that,” said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute. “It’s logically possible” that a tax cut could spur sufficient economic growth to pay for itself, Viard said. “But there’s no evidence that these tax cuts would come anywhere close to that.”

And as much as it pains me to say this, Hastert is probably right,

House Speaker J. Dennis Hastert (R-Ill.) claimed credit for “driving down the deficit” and accused Democrats of plotting to roll back the tax cuts if they win a majority in the House, a move Hastert said “would destroy jobs and hurt the economy.” Bush, meanwhile, called on Congress to permanently extend the cuts, which are scheduled to expire by 2010, at an additional cost to the Treasury of $2.2 trillion by 2016, according to CBO estimates.

Right now the economy is softening, and thus it is not a good time for a tax cut. Contrary to some of the whacky beliefs of those on the Left who eschew data and economic theory, raising taxes when the economy is weak is not usually a good idea. Still, this doesn’t mean that making the tax cuts permanent is the right move either. Both Bush and the Republicans in Congress have shown complete disdain for reigning in spending as my initial post has showed. The fiscal outlook is already rather bleak when on considers Medicare spending growth and making the tax cuts permanent would simply make things worse without at least some cuts elsewhere in the budget. And even cuts elsewhere in the budget would not likely be large enough to offset the impact of making the tax cuts permanent. Not unless we want to look into cutting things like defense spending.

Lets also keep something else in mind as well: if growth falters then it is likely that tax receipts will also falter. In short, the current success Bush has had in “reducing the deficit” hinges on continued growth. Take away that growth and Bush will likely be faced with growing deficits once again. Bush’s fiscal policy is basically to go deeper into debt as income increases. This isn’t what most of people would consider good budgetary practices.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Steven Plunk says:

    “Federal revenue is lower today than it would have been without the tax cuts”

    Likely so. But tax (rate) cut stimulation of tax receipts comes delayed. The question is what effect this will have over a longer period of time. Unfortunately when you stretch the time frame out other factors can influence tax receipts and economic growth.

    Sometimes it’s not just about increasing revenues but growing an economy that benefits citizens more than their government’s treasury.

    The best answer is still cuts in spending but representative democracy is flawed when it comes to fiscal responsibility. Term limits would help.

  2. Tano says:

    So Steve, hearing yet again that under current conditions, it would not be wise to raise taxes, let me ask you the question I have never really heard answered by any of the tax-cutters.

    Assume that someone would wish to reduce the size of the national debt, and wishes to run balanced budgets, and concludes that some sort of a tax increase is really necessary – not desirable of course, but necessary. I know this logical path would be hotly disputed, but for the moment, lets take it as assumed. Now, under what set of economic conditions would some relatively small tax increase be least damaging to the economy?

  3. Wayne says:

    ” if growth falters then it is likely that tax receipts will also falter”, the key there is to make sure growth doesn’t falter. Making the tax-cut permanent can help to insure that growth doesn’t falter. Yes, I would like to see more budget cuts or at least less growth in the budget. If they can do that then the deficit will keep declining. Increasing taxes will hurt the economy therefore hurt tax receipts.

    Steve
    You keep talking down the economy but according to the numbers it is still quite good. You can keep mentioning an indicator that you think means the future is bleak but that just speculation. The numbers now were considered great when there was a democrat in the Whitehouse but not now. Unemployment, growth, and job creation have been great even though every time they tick the other way the MSM predicts doom.

  4. Steve Verdon says:

    Tano,

    Now, under what set of economic conditions would some relatively small tax increase be least damaging to the economy?

    During an expansion, preferably at the point where it is starting to heat up…just like under Clinton. His tax increase was well timed. Whether it was done that way on purpose or simply just luck, I don’t know…probably both.

    Wayne,

    …the key there is to make sure growth doesn’t falter. Making the tax-cut permanent can help to insure that growth doesn’t falter. Yes, I would like to see more budget cuts or at least less growth in the budget. If they can do that then the deficit will keep declining. Increasing taxes will hurt the economy therefore hurt tax receipts.

    The only problem is that we face a huge looming fiscal imbalance that we simply cannot grow out of. Even if the supply side theories were right (and they aren’t) you couldn’t cut taxes low enough to solve the future imbalance.

    You keep talking down the economy but according to the numbers it is still quite good.

    According to the numbers it looks like we are heading for a soft landing.

    You can keep mentioning an indicator that you think means the future is bleak but that just speculation.

    Not quite. It is looking at the indicator then extrapolating what that means for the rest of the economy. For example, many people are likely going to see an increase in their mortgage interest rates. This will mean less disposable income, that means less consumption expenditures, and that means slower growth. That doesn’t mean a recession has to result, but it does indicate weaker growth at best.

    The numbers now were considered great when there was a democrat in the Whitehouse but not now.

    Well, I’d have to go back and search through old articles to see what people were saying when Clinton was in office. I wouldn’t be suprised if there were some moments where people thought things were slowing down a bit.

    Unemployment, growth, and job creation have been great even though every time they tick the other way the MSM predicts doom.

    While unemployment is good, the payroll survey says the job situation is less than great. Which is true is open to debate, but to say things are not going to slow down is to stick one’s head in the sand, IMO.

  5. TJIT says:

    Steve,

    You said

    “The only problem is that we face a huge looming fiscal imbalance that we simply cannot grow out of.”

    If I am not mistaken most of that imbalance is related to entitlement spending. That imbalance was worsened by the medicare prescription drug benefit.

    Over the years congress has shown plenty of willingness to increase taxes (under Reagan, Bush 1, and Clinton) and no ability to cut entitlement spending. This is non sustainable and a big reason I disagree with those who think raising taxes will fix the problem.

    Every time congress has gotten more tax revenue they have spent every bit of it and added on more spending above what the tax increase brought in.

    Until congress shows some willingness to control spending I flatly oppose any increase in taxes.

  6. Michael says:

    The numbers now were considered great when there was a democrat in the Whitehouse but not now.

    So if the DOW (which is what I’m assuming you’re basing most of this on) is at the same level now as it was a decade ago, that means things are going great?

  7. legion says:

    Even if the supply side theories were right (and they aren’t) you couldn’t cut taxes low enough to solve the future imbalance.

    Well, what about looking at the other side of it? As I understand it, the reason supply-side doesn’t work is that it assumes that money given back to the wealthy will be plugged back into the economy, creating better jobs & wages for more “regular folks”, which grows the economy, and that’s not what happens. But is there some systemic way to _make_ it happen?

  8. Steve Verdon says:

    So if the DOW (which is what I’m assuming you’re basing most of this on) is at the same level now as it was a decade ago, that means things are going great?

    Uhhmmm…well technically, the Dow back in 1996 was about half of what is now–that is about 6,000.

    Well, what about looking at the other side of it? As I understand it, the reason supply-side doesn’t work is that it assumes that money given back to the wealthy will be plugged back into the economy, creating better jobs & wages for more “regular folks”, which grows the economy, and that’s not what happens. But is there some systemic way to _make_ it happen?

    No, the results from reality contradict the idea that demand side stimulus can produce large amounts of gorwth as well, for pretty much the same reasons: the money was always in the economy.

    That is if you tax money from individuals, then they have less to spend. That the government is spending it doesn’t make it more productive. Further, taxes are associated with an efficiency loss, due to the deadweight loss of taxes.

    A similar critique can be leveled at your supply side reasoning. The government doesn’t hoard money (i.e. stuff it a government issue mattress). They spend it too. So not having the government spend it and give it to people to spend wont give you much more of a bang for buck, or even the same bang or even maybe a smaller bang, depending on a number of factors. That isn’t the only reason why the supply side argument is dubious, but this does explain why tax cuts in recent years haven’t produced more revenue than they’ve “cost”.

  9. Michael says:

    Uhhmmm…well technically, the Dow back in 1996 was about half of what is now—that is about 6,000.

    Fair enough. However the comment was about the the man in office, not the 10 year figure I gave, so what was the DOW sitting at when Bush was sworn in?

  10. Steve Verdon says:

    Probably around 10,000.

  11. Wayne says:

    “So if the DOW (which is what I’m assuming you’re basing most of this on)”

    You are assuming wrong. Look at last years job growth, GDP growth, and unemployment. Also compares this to how Europe is doing so poorly which also have a negative influence on the U.S. economy.