Do Tax Cuts Pay for Themselves?

March 14, 2006By Chuck Sheketoff

At the recent annual Dorchester conference of Oregon Republicans, US Senator Gordon Smith reportedly talked about taxes, the economy, and the size of government. Smith argued that the tax cuts passed since President Bush took office were good for the economy and were bringing more revenues into government coffers. Apparently, some people just won’t let facts get in the way of their political agenda.

If you look at the numbers in the President’s budget, you see there is no such thing as a free lunch. Despite the spin from Senator Smith, tax cuts don’t pay for themselves.

Actually, according to the Congressional Budget Office and the President’s Office of Management and Budget, if Congress extends the tax cuts as proposed by the President the deficit gets worse!

Call me a fiscal conservative, but I think the near-record deficit resulting from this budget is bound to be harmful to our economy and to our future. The only way to get back to the surpluses we enjoyed in the 1990s is to end the irresponsible, help-the-wealthy, tax cuts Smith touts.

No matter how many times Senator Smith says it, the tax cuts are not filling the government coffers.

If they aren’t filling the government coffers, have the tax cuts been good for the economy as claimed by Smith?

Well, when you adjust for inflation and population changes, revenues over the economic recovery so far have fallen at an annual rate of 0.6 percent. Compare that dismal record to revenues during the average post-World War II recovery, where they grew at an annual real per-person rate of 2.7 percent. Moreover, revenues grew much more quickly in the 1990s, when taxes were raised, than in the 1980s, when taxes were cut.

Smith’s claim that cutting capital gains taxes caused an increase in capital gains tax revenues is also without merit. The Congressional Budget Office refuted this claim one week before the Oregon GOP’s annual gathering at the coast. CBO studied the volatility of capital gains and concluded in a letter to the Chair of the Senate Finance Committee that the tax cuts did not cause a growth in capital gains. Moreover, while the stock market went up after the tax cut, three Federal Reserve economists recently debunked the myth that the tax cut caused the market gains.

Even President Bush’s own budget does not make the claim that Smith makes about tax cuts magically paying for themselves.

Before Oregonians buy the Smith hype, they ought to consider the advice of a former economic advisor to the President. N. Gregory Mankiw, former chair of President Bush’s Council of Economic Advisors and a Harvard economics professor, asserts that an economist who claims that tax cuts can pay for themselves is like a “snake oil salesman trying to sell a miracle cure.”

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See the graph: Ending Tax Cuts Key to Ending Deficit