Treasury Department Study Finds the Bush Tax Cuts Will Pay For Less Than 10 Percent of Their Cost
According to CBO’s official cost estimate, the Administration’s proposal to make the tax cuts enacted since 2001 permanent would cost 1.4 percent of GDP annually. (This does not include the AMT relief that the Administration proposes on an annual basis, which would bring the total cost to 2 percent of GDP.)
According to the Mid-Session Review, the tax cuts would have positive long-term economic effects that would raise national income by “as much as” 0.7 percent over the long term. With tax receipts projected to be about 18 percent of national income, this translates into an increase in revenues of as much as 0.13 percent of GDP.a In this scenario, which assumes that the tax cuts are financed by future cuts in government spending, the tax cuts would cost about 1.27 percent of GDP annually — or more than 90 percent of the conventional cost estimate. (Under Treasury’s alternative financing scenario, the tax cuts would actually reduce national income over the long run.)
Could the Tax Cuts Pay for Themselves Over Time?
Proponents of the tax cuts might argue that the stronger revenue growth in 2005 represents the beginning of a trend and that the tax cuts will pay for themselves over time. This claim is contradicted by the historical record, as well as by the Administration’s own projections.
Tax Cuts Have Not Paid for Themselves in the Past Senator Charles Grassley (R- IA) recently stated, “There is a mindset in both branches of government that if you reduce taxes you have a net loss, if you increase taxes you have a net gain, and history does not show that relationship.”[8] A look at the past two decades, however, shows exactly that relationship.
In 1981, Congress substantially lowered marginal income-tax rates on the well off. In 1990 and 1993, by contrast, Congress raised marginal income-tax rates on the well off. When the 1981 tax cuts were being debated, some supporters contended the tax cuts would more than pay for themselves. Similarly, opponents of the 1990 and 1993 tax increases claimed they would damage the economy and cause tax receipts to grow more slowly in the 1990s than in the 1980s.
In fact, the economy grew at about the same rate in the 1990s as in the 1980s, while tax revenues grew about twice as fast in the 1990s as in the 1980s: 3.5 percent (after adjustment for inflation and the increase in the size of the population), compared to 1.7 percent in the 1980s.
snip The Administration Itself Does Not Project that the Tax Cuts Will Pay for Themselves
another snip Deficit-Financed Tax Cuts May Cost Even More than Official Estimates
A recent CBO study of the economic effects of tax cuts found that how tax cuts are financed significantly impacts how they affect the economy. In the short run, deficit-financed tax cuts may help stimulate an economy in recession and thus temporarily improve growth (although the 2001 and 2003 tax cuts were poorly structured as stimulus). But in the long run, the deficits that result from unpaid-for tax cuts constitute a drag on the economy because they lower national savings.[16]
For this reason, deficit-financed tax cuts may actually weaken long-run economic growth. A study and literature review by Brookings Institution economists William Gale and Peter Orszag, for instance, concluded that the 2001 and 2003 tax cuts were “likely to reduce, not increase, national income in the long term” because of their effect in swelling the deficit.[17] Studies by economists at the Congressional Budget Office and the Joint Committee on Taxation have found that, even in models that predict that deficit-financed tax cuts can have a positive economic impact over the ten-year budget window, their longer-run impact is negative.[18]
If deficit-financed tax cuts weaken economic growth, their long-run cost could be greater than conventional revenue estimates suggest, because they will reduce revenues not only directly (by lowering people’s tax bills) but also indirectly (by slowing the economy). A recent CBO study of the economic effects of a hypothetical 10 percent across-the-board cut in income tax rates found that under certain assumptions, the increased deficits resulting from the tax cut would be enough of a drag on the economy that the tax cut actually would lose more revenue than if one assumed it had no effect on the economy. In other words, deficit-financed tax cuts could be even more expensive than officially “scored,” rather than less expensive or costless.
In the final analysis, the idea that tax cuts can spur sufficient economic growth to pay for themselves sounds too good to be true because it is too good to be true. In tax policy, as in other aspects of policymaking, there is no “free lunch.”
There is much more at the link . I understand what you are saying about government spending . I just do not think it will go away . We live in a country that has offered great opportunities to many and has helped to increase the wealth for many - for continued success there will always be government spending . It is up to us, to vote out, at the local level the 'wasteful spenders' . Education, health-care , infrastructure , military, etc. , these are the building blocks for a great country - these services are not found in third world countries .
The Bush tax cuts also appear to be well on their way to "paying for themselves," despite the dire warnings of his critics
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