Good Article by Jonathan Chait

[dtotire]

I posted this a while back, it should be shown to supply-siders.


Jonathan Chait: Bush's Silly Budget Logic
Why the president's assertion that his tax cuts are boosting revenue is wrong.
October 22, 2006
ALAN D. VIARD, a former Bush White House economist currently at the conservative American Enterprise Institute, recently told the Washington Post: "Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that."

He's right. There's no dispute among economists. Conservative, moderate or liberal, every credentialed economist agrees that the Bush tax cuts caused revenues to drop. There is, however, a dispute between economists and pseudo-economists. Supply-siders may be laughed at by real economists, but they still enjoy a strong following among politicians, including, alas, the president of the United States. Here is what President Bush said a week and a half ago:

"They said that we had to choose between cutting the deficit and keeping taxes low — or another way to put it, that in order to solve the deficit we had to raise taxes. I strongly disagree with those choices. Those are false choices. Tax relief fuels economic growth, and growth — when the economy grows, more tax revenues come to Washington. And that's what's happened. It makes sense, doesn't it?"

Well, no, it doesn't make any sense at all. Bush, of course, is correct that tax revenues have risen over the last few years. This is normal.

Except in certain extreme theoretical conditions, tax cuts cause revenues to fall, and tax hikes cause them to rise. The economy also can affect revenues. During an expansion, revenues can rise unusually fast, and during a recession, they can drop unusually fast.

The latter is what happened following the first Bush tax cut. When Bush took office, tax revenues accounted for 19.8% of gross domestic product. After the tax cut, they collapsed to a low point of 16.3% — far lower than even the most pessimistic projection.

Yes, revenues have risen from that low level, but they still haven't recovered. The Center on Budget and Policy Priorities found that revenues currently lag $200 billion behind the revenue growth you would normally find during a recovery.

Now, Bush's reply to that is to say that if it weren't for his tax cuts, we would still be in a recession. Indeed, in the same Oct. 11 speech, he asserted, "I'm convinced that if we had raised taxes, it would cause there to be an economic decline, which would make it harder to balance the budget over the years."

Because Bush can veto any tax hike, we can't know for sure whether he's right. But there's another pretty good way to check that claim: Go back to the last time there was a major tax hike. That was in 1993. Just about every major elected Republican predicted the 1993 tax hike would slow down the economy, probably cause a recession and cause revenues to decline. Instead, they boomed, rising from 17.5% of GDP when Bill Clinton took office to 19.8% when he left.




Republicans say Clinton just benefited from a good economy. Of course he did. That's the point. Raising taxes on the rich, within reason, did nothing to slow down the economy. Moreover, that same logic applies to Bush. Clinton did not invent the business cycle, and neither did the current president. Both benefited from a growing economy.

But here's the difference. Clinton inherited a large deficit and, with the economy going full-tilt, turned it into a sizable surplus. Bush inherited a sizable surplus and, with the economy going full-tilt, he's still running a deficit north of $200 billion. If Bush had a responsible fiscal policy, we'd be paying off our debt right now, not adding to it.

In the same speech in which he claimed that his tax cuts have caused revenues to rise, Bush bragged that he's "restraining spending." So why do we still have a deficit? I mean, he says he's kept spending down, he's caused revenues to skyrocket and the economy is going great guns. Why are we still in the red?

And if Bush's own economists say his tax cuts caused revenue to drop — and Viard isn't the only one — then how can he continually get away with insisting the opposite?


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http://www.latimes.com/news/opinion/sunday/commentary/la-oe-chait22oct22,0,233760.column?coll=la-sunday-commentary