Tax Cuts Have Paid Their Own Way

From IBD:
Posted 5/18/2006

Fiscal Policy: Critics of tax cuts argue that lower rates lead to "losses" of revenue. That's true if nothing happens after taxes are cut. Which, of course, isn't the case.

The latest volleys in this fight came this week, as President Bush signed into law legislation extending lower rates on capital gains and dividend incomes through 2010.

The president's move has been all but written off by many — especially in the media — as a sop to rich supporters who will benefit disproportionately from the tax cuts. They argue the cuts will "cost" the federal government more than they bring in, and make the deficits worse. They also contend that "tax cuts for the rich" today will have to be paid off by working Americans and their children and grandchildren tomorrow.

Sadly, this is what passes for economic argument these days — cheap, ad hominem attacks on the rich, with little scrutiny of both the current reality and history.

Let's start with the deficit.

Believe it or not, it is shrinking. And fast. This has nothing whatever to do with spending restraint. From 2001 to 2006, overall spending is expected to soar 42%, to nearly $2.7 trillion. Yet, despite that whopping gain, the deficit is getting smaller.

Last year, it was $318 billion, or 2.6% of GDP — after the Office of Management and Budget predicted early in the year that it would reach $423 billion, or 3.6% of GDP. The lower figure was derided at the time as a fluke, a cheap political stunt by Bush's budget magicians.

Well, this year the deficit is falling again — below $300 billion, recent estimates show. For the record, that will be less than 2.5% of GDP — which is below the 25-year average of 2.7%.

How could this be? In a word: growth. The economy took off after the 2003 tax cuts, creating more revenues than even the spendthrifts in Congress imagined.

Take just one example: capital gains tax cuts, one of the favorite targets of those who want to soak the rich.

According to Congressional Budget Office data, the reduction in the cap-gains rate to 15% was expected to cost the federal government some $27 billion in revenues. But it didn't happen that way.

In fact, as Macrolytics' Donald Luskin recently pointed out, the tax cuts ended up bringing in $26 billion in added revenues — exactly the opposite of what was predicted.

This has happened everywhere in the economy. Revenues from cap gains, corporate and income taxes are up sharply, pouring into government coffers across the board.

Fact is, tax cuts do "pay for themselves" — by creating strong new incentives to work, produce and invest that make the economy larger and stronger. Data show this conclusively.

In the 11 quarters following the tax cuts, total real GDP grew $1.15 trillion, or more than 11%. In the 11 quarters before that — a period that included a record drop in stock prices and a series of economy-killing interest-rate hikes by the Federal Reserve — GDP expanded just 7.7%, or $728 billion. Tax cuts did the job, very decisively.

Following the tax cuts, revenues soared nearly 21% from 2003 to 2005. In the three years before that they declined 12%.

After the May 2003 tax cuts, rates eased for most Americans. Yet revenues rose, along with the economy. This always happens after major tax cuts. It did during the Reagan era. It did during the Kennedy boom. It did during the Roaring '20s. And it did after President Bush gave relief to all Americans who paid taxes.

Add a modicum of federal spending restraint, plus a little entitlement reform, and the budget could easily be put back into surplus within a few years. All it would take is some discipline — and a lot less fear-mongering and distortion by the media.