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March 12, 2011

The Tax Cuts Did Not Cause the Deficit

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The 2001/2003 tax cuts are blamed for past, present, and future budget deficits. The numbers tell a different story.

When the tax cuts were enacted in 2001, the Congressional Budget Office (CBO) forecast a $5.6 trillion surplus between 2002 and 2011. Instead, Washington is set to run a cumulative $6.1 trillion deficit over that period. So what caused this dizzying $11.7 trillion swing? CBO data reveal that the much-maligned tax cuts, at $1.7 trillion, caused just 14 percent of the swing from projected surpluses to actual deficits (and even that excludes any positive economic impact of the tax cuts).

The bulk of the swing resulted from two recessions, two stock market crashes, and other economic/technical factors (33 percent), other new spending (32 percent), net interest on the debt (12 percent), the 2009 stimulus (6 percent) and other tax cuts (3 percent).

Specifically, the tax cuts for those earning more than $250,000 are responsible for just 4 percent of the swing. Even without any tax cuts, runaway spending and economic factors would have guaranteed more than $4 trillion in deficits over the decade and kept the budget in deficit every year except 2007.

In 2011, low tax revenues are a temporary result of the sluggish economy. The $200 billion annual cost of the tax cuts (three-quarters of which go to those earning under $250,000) is not a major player in the $1.5 trillion budget deficit.

The tax cuts are not driving future budget deficits, either. Over the past half-century, tax revenues have deviated little from their 18.0 percent of the gross domestic product (GDP) average. By the end of the decade (once the economy recovers), tax revenues are projected to reach 18.4 percent of GDP – even with all tax cuts extended – and continue surging thereafter. This is because rising real incomes automatically push taxpayers into higher income tax brackets, increasing tax revenues’ share of the economy.

Runaway federal spending is the real driver of long-term budget deficits. While tax revenues will return to their historical average by the end of the decade, spending is projected to soar by 6 percent of GDP above its own historical average – resulting in deficits approaching $2 trillion annually.

Put differently, the tax cuts (which acknowledge that it’s the people’s money) are projected to reduce revenues by (at most) $3 trillion over the next decade. By contrast, Washington is projected to spend $48 trillion, including $17 trillion on Social Security and Medicare, and $8 trillion on antipoverty programs.

It’s the spending, stupid.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs at The Heritage Foundation.

First appeared in The CQ Researcher

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