Janet's Conner

This Blog tell the Truth and will never not tell the Truth. Impeach Bush

Wednesday, May 31, 2006


For the past five years, Congress and President Bush have been cutting taxes in the face of huge deficits, all the while peddling a math myth to the public.

Tax cuts won't make the deficits worse, they say. Tax cuts will stimulate so much economic growth that federal tax revenue will actually increase. Tax cuts, they are fond of saying, pay for themselves.

Actually, no. Economists of all stripes agree that federal tax cuts by themselves do not boost federal revenue back to the level before the cuts were enacted.

Tax cuts do not boost economic activity. This growth does replace a portion of the revenue once generated by the eliminated taxes. But far from all. Very far. Researchers' estimates of this replacement effect vary from around 15 percent to 50 percent, depending on the type of tax cut and the prior rate.

Any responsible politician should know this, buts pols persist in peddling the cozy myth. Sen. Rick Santorum (R-PA), played around earlier this month when Congress extended tax cuts on capital gains and dividend income for two years, at a cost to the federal treasury of $70 billion.

"We've put these tax provisions in place," Santorum said, "and they've raised money."

Even President Bush's former economic adviser, N. Gregory Mankiw, concedes that activity spurred by the capital gains tax cuts made up only about half of the lost revenue.

What do you call the other half? Under this administration, you call it "deficit."

Data from the President's own Office of Management and Budget refute the argument that tax cuts "pay for themselves." Over the past three years, with tax cuts in effect, federal revenue was $316B lower than OMB had predicted, in 2003, that it would have been without tax cuts.

The federal deficit this fiscal year is projected at more than $330B.

From 2001 to 2005, federal revenue fell at an average of 0.06 percent when adjusted for inflation and population growth, according to the left-leaning think tank Center on Budget and Policy Priorities in Washington.

Some Republicans lawmakers point out that the tax receipts through April were up about $137B, or 11 percent, compared with the same period last year. Credit tax cuts for some of that, if you want, but be aware that national economies are complex creatures that grow or shrink based on dozens of factors, of which tax rates are only one. Inflation, too, could partly explain it.

But that increase still is not enough to offset recent losses to the federal coffers. Nor do the White House's own projections expect deficits to end anytime soon.

Again, the key point: No matter what you've been repeatedly told, an improved economy does not generate all the tax revenue that was lost due to cutting federal taxes in the first place. The evidence proving this basic point has been piling up since Ronald Reagan's tenure, but many tax-cut fans still won't admit it. Why? Because the pay-for-themselves theory was never based of fiscal evidence. It was a theology, a faith-based system defended all the more strenuously because of that.

(A side point: Tax cuts can come much closer to paying for themselves on a local stage, in a city such as Philadelphia, where comparatively high taxes really do discourage investment, and those seeking to escape those taxes do not have to leave the nation but merely take a step across City Avenue).

The federal tax-cut mythology wouldn't have such dire consequences, if Congress and the president reduced federal spending in line with the lower revenues.

Since Reagan, that draconian balancing act has been the goal of some conservatives bent on cutting the social programs that have aways irritated them.

Trouble is, that plan hasn't worked. In five-plus years of almost total domination of Washington by the self-described "conservatives" of the White House and Capitol Hill, federal spending has increased about 29 percent, even as tax cuts drained the Treasury.

And, no, not all that spending is due to hurricanes, terrorism and wars. (Let's not even get into the point that the wildly costly Iraq War was a choice, not a necessity). David Walker, comptroller-general of the United States, says only about a third of the stated deficit can be traced to those causes.

Remember those golden days of the 2000 presidential campaign when the big issue was how to spend the roughly $5.6 trillion in federal surpluses projected for this decade?

Instead, surpluses turned to deficits, with a vengeance, once the Bush tax cuts went into effect. During the Bush years, the national debt has soared from $5.8T to more than $8.3T.

Why haven't the Republican powers inside the Beltway cut government more? Well, some of them were too busy throwing government money at the corporate friends who keep them in power and get them onto all the nice golf courses.

But the bigger reason is that every time budget-cutters hover their ax over any of the middle-class benefits where the big money flows, voters scream bloody murder.

Turns out people really like most of what big government provides.

They like to help with J. J.'s college tuition, and with Grandma's nursing home bills and prescription drugs. They like having a teaching hospital full of brilliant doctors and expensive equipment nearby. They demand a strong national defense and better homeland security. And they are really, really fond of the tax deduction for their home mortgage interest.

Taxpayers are human. They like a good deal. If politicians tell them they can get all the government benefits they secretly love at a discounted price, they'll cheer.

And, as some genuine fiscal conservatives are ruefully coming to realize, people who are getting government at what feels like a discounted price (i.e. lower taxes) aren't going to clamor for less government. They're going to clamor for more, for benefits like a prescription drug benefit that Medicare has no idea how to pay for.

But, in fact, these government benefits aren't really being bought at a discount. They're being bought with reckless borrowing. They'll get paid for, all right, but the payment will come down the road in higher taxes, higher interest rates and economic anxiety.



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