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February 13, 2007

Top 10 Myths About the Bush Tax Cuts

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10. Myth: The Bush tax cuts were tilted toward the rich.

Fact: The rich are now shouldering even more of the income tax burden. From 2000 to 2004, the share of all individual income taxes paid by the bottom 40% of taxpayers dropped from 0% to -4%, meaning that the average family in those quintiles received a subsidy. The share paid by the top 20% of households increased from 81% to 85%.

9. Myth: The Bush tax cuts have not helped the economy.

Fact: The economy responded strongly to the 2003 tax cuts. The 2003 tax cuts lowered income, capital gains and dividend tax rates. These policies increased market incentives to work, save and invest, creating jobs and increasing economic growth.

8. Myth: Tax cuts help the economy by "putting money in people's pockets."

Fact: Pro-growth tax cuts support incentives for productive behavior. Government spending does not "pump new money into the economy," because government must first tax or borrow that money out of the economy. The right tax cuts help the economy by reducing government's influence on economic decisions and allowing people to respond more to market mechanisms.

7. Myth: Reversing the upper-income tax cuts would raise substantial revenues.

Fact: The low-income tax cuts reduced revenues the most. In 2007, the increased child tax credit, marriage penalty relief, 10% bracket and Alternative Minimum Tax fix will have a combined budgetary impact of minus $114 billion -- without strong supply-side effects to minimize that effect. But the more maligned capital gains, dividends and estate tax cuts are projected to reduce 2007 revenues by just $36 billion, even before the large supply-side effects are incorporated.

6. Myth: Raising tax rates is the best way to raise revenue.

Fact: Tax revenues correlate with economic growth, not tax rates. Since 1952, the highest marginal income tax rate has dropped from 92% to 35%, and tax revenues have grown in inflation-adjusted terms while remaining constant as a percent of GDP.

5. Myth: The Bush tax cuts are to blame for the projected long-term budget deficits.

Fact: Projections show that entitlement costs will dwarf the projected large revenue increases. Revenues are projected to increase from 18% of GDP to almost 23% by 2050, while spending is projected to increase from 20% of GDP to at least 38%.

4. Myth: Capital gains tax cuts do not pay for themselves.

Fact: Capital gains tax revenues doubled following the 2003 tax cut. In 2003, capital gains tax rates were reduced from 20% and 10% (depending on income) to 15% and 5%, respectively. Rather than expand from $50 billion in 2003 to $68 billion in 2006 as the CBO projected, capital gains revenues more than doubled to $103 billion.

3. Myth: Supply-side economics assumes that all tax cuts immediately pay for themselves.

Fact: It assumes replenishment of some but not necessarily all lost revenues. Supply-side economics never contended that all tax cuts pay for themselves. Rather the Laffer Curve merely formalizes the common-sense observations that: Tax revenues depend on the tax base as well as the tax rate; raising tax rates discourages the taxed behavior and shrinks the tax base, offsetting some of the revenue gains; and lowering tax rates encourages the taxed behavior and expands the tax base, offsetting some of the revenue loss.

2. Myth: The Bush tax cuts substantially reduced 2006 revenues and expanded the budget deficit.

Fact: Nearly all the 2006 budget deficit resulted from additional spending above the baseline. Historic spending increases pushed federal spending up from 18.5% of GDP in 2001 to 20.2% in 2006.

1. Myth: Tax revenues remain low.

Fact: Tax revenues are above the historical average, even after the tax cuts. Tax revenues in 2006 were 18.4%of gross domestic product (GDP), which is actually above the 20-year, 40-year, and 60-year historical averages.

Brian Riedl is a Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

First appeared in Human Events

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