Wednesday, August 08, 2007

Supply Side Economics Is a Farce

Just a little food for thought next time your congressman or anyone else tries to tell you that tax cuts pay for themselves. In a recent House Budget Committee hearing, the Director of the Congressional Budget Office, Peter Orszag, told the committee in no uncertain terms that the Bush tax cuts did not pay for themselves. There's a good three minute exchange starting at the 32:30 mark that is worth watching. It leaves no doubt that the Bush tax cuts not only didn't pay for themselves but are also the reason why we don't have a balanced budget this year:
Congressman Edwards: Had it not been for the tax cuts passed during the Bush administration would we have a federal balanced budget in 2007?

Peter Orszag: Mr Edwards, we responded to a letter from Mr Spratt on that question and noted that there are no current estimates of the revenue impact from the tax legislation. However if you combined original Joint Committee on Taxation scores for that revenue legislation with an estimated macroeconomic impact from a variety of models, one gets a budgetary impact on the range of $200 Billion which is slightly higher than what we expect the budget deficit to be this year.

Congressman Edwards: So had it not been for those tax cuts we'd have a balanced budget today. The real debate on the PayGo is that Republicans in Congress are saying Pay as You Go should only apply to spending and not to tax cuts. They seem to imply that somehow you can cut taxes dramatically and not have an impact on the deficit which factually is dead wrong and history has certainly proven that in the 1980s and again in this decade. Dr Orszag may I ask you specifically, if you cut taxes by $1 is there any credible evidence to suggest that you bring in an extra dollar in federal revenue to make up for that tax cut?

Peter Orszag: No, there is evidence that you offset perhaps some of the cost. It depends exactly what kind of tax cut it is and it depends on how it's financed but a full offset - that is the notion that tax cuts pay for themselves - is not supported by serious analytical work.

Congressman Edwards: Not supported by serious analytical work - thank you for that. In fact I think that some CBO serious analytical work said in some cases tax cuts at the very best most optimistic assumption might bring back 20 to 25 cents for every dollar lost in revenue and actually went further to say that when tax cuts, as these Republican tax cuts, have been payed for by borrowing money from the Chinese and Japanese and other foreign countries that it would actually harm the economy and reduce federal revenues. Isn't that correct that the CBO has said that tax cuts when payed for with borrowed money could actually hurt the economy and economic growth?

Peter Orszag: That is correct but that's also a reflection of a variety of studies and not just CBO's own studies.


Robert said...

When the administration's tax cut was passed in 2003, Federal Revenues for that fiscal year ran just short of $1.8 Trillion. FY2006 Revenues to the Treasury were $2.15 Trillion. So revenues went up almost 20% while we taxpayers sent less of our hard earned money to uncle.

Sounds like a win-win deal to me. Of course, those of you who think that you are under-taxed can send voluntary contributions to the Treasury (but I am not holding my breath).

Jeff Pruitt said...

I'm not suggesting we're under-taxed; far from it Robert.

I'm only suggesting that no serious economist supports the idea that tax cuts pay for themselves. I'm not against the idea of tax cuts as long as they're accompanied by SPENDING cuts to offset the lost revenue.

We had Paygo until the Republican congress removed it for their tax cuts because they claimed Paygo should only apply to the spending side of the ledger. True fiscal conservatives believe that Paygo must be applied to both sides of the ledger.

That's the point I was trying to make here. There is absolutely no data to suggest tax cuts offset themselves 100% - none whatsoever. That doesn't mean we can't cut taxes; it just means we should be honest when doing so.

Both the comptroller general and the director of the congressional budget office take this position...