An editorial in today’s NY Times (link unavailable) includes the following untruth:
Republicans want voters to believe that the deficit is the result of spending increases alone – not tax cuts. That’s false. The swing from a $236 billion budget surplus in 2000 to a $371 billion deficit today is a huge deterioration in the nation’s fiscal balance, equal to 5.3 percent of the economy. Of that, fully 62 percent is due to lower tax revenues.
Without knowing the source of the “62 percent” statistic, I am left to challenge the general points that the editors are trying to make. 1) Tax revenues have fallen since 2000. 2) Lower tax revenues played a much greater role in widening the deficit than increased spending did. 3) The underlying assumption that tax cuts are synonymous with lower tax revenue.
The Congressional Budget Office’s Historical Budget Data (pdf) directly contradicts these claims. According to the CBO, between the years 2000 and 2005 (the last fiscal year for which actual data is available), tax revenue increased by 6.3 percent. During the same time, spending increased by 38.2 percent, which would support the thesis that spending played more of a role in widening the deficit.
I decided to give the NY Times the benefit of the doubt and assume that they were referring to tax revenue being lower now than it had been projected to be prior to the Bush tax cuts. With that in mind, I looked this CBO report from April 2000.
The old report did predict that 2005 revenues would be about $200 billion higher than they turned out to be. But it also projected spending would be $358 billion lower than it actually was in 2005. To put it another way, if we pretend that the Bush tax cuts hadn’t been instituted and that tax revenue rose as projected, we’d still be looking at a $120 billion deficit, based on today’s spending levels. However, if you reverse that experiment and assume that spending only grew at the pace it was expected to, we’d be enjoying a $39 billion surplus, even with today’s lower than projected revenue levels.
Of course, the tax revenue projections are no doubt based on rosy economic growth forecasts, because they were made before the effects of the stock market collapse and 9/11 were felt.
In closing, it’s worth pointing out that there’s no real way to isolate the effect that a change in tax rates has on tax revenue, because economic growth plays such a key role. Supply side economists have long argued that lowering tax rates can boost tax revenue by generating economic growth (sort of like a retailer that increases sales by reducing its prices). This view is certainly supported by data showing that tax revenue rose during the Reagan presidency and (current) Bush presidency, even though both presidents reduced taxes. Liberals may disagree on this point, but there should be no disputing the fact that the relationship between tax rates and tax revenues is a tricky one to pin down and that any number somebody quotes on the issue is merely an estimate. But the NY Times emphatically states, “fully 62 percent is due to lower tax revenues,” without qualifying it as an estimate or identifying the source. As a result, readers cannot assess the methodology that was used to arrive at the figure.