The 2001/2003 Tax Cuts: Myth vs. Reality

The 2001/2003 Tax Cuts: Myth vs. Reality [Brian Riedl]

Congress, blaming the 2001/2003 tax cuts for structural budget deficits, is considering letting many or all of them expire this December. However, my new report, “The Three Biggest Myths About Tax Cuts and the Budget Deficit,” shows:

● The 2001/2003 tax cuts are responsible for just 14 percent of the swing from budget surpluses to budget deficits between 2002 and 2011. CBO data reveals that spending and economic factors play an overwhelmingly larger role in the deficits.

● More specifically, the tax cuts for those earning more than $250,000 are responsible for just 4 percent of the swing from surpluses to deficits.

● Even without any tax cuts, Washington would have run $4 trillion in deficits over the decade as a result of runaway spending as well as economic factors.

● The president’s claim that future budget deficits are “the result of not paying for two wars, two tax cuts, and an expensive prescription drug program” is based on a methodology that fails basic statistics — and is still wrong even by that methodology.

● Repealing the “Tax Cuts for the Rich” would close just 5 percent of the 2011–2020 budget deficit, and would be dwarfed by trillions in new spending.

● Even if all tax cuts are extended and the AMT is fixed, tax revenues are still projected to surpass their 18.0 percent of GDP historical average by 2017. That means 100 percent of the surging budget deficit after 2017 will be the result of Washington spending 6 percent of GDP more than the historical average. None of it will be caused by below-average revenues.

● Specifically, 90 percent of the rising budget deficit by 2020 will be the result of rising entitlement and net interest spending, while the other 10 percent will be the result of other spending hikes. Above-average revenues will partially offset this new spending (even with all tax cuts).

Read the entire report (with printable version here).

— Brian Riedl is Grover M. Hermann fellow in federal budgetary affairs at the Heritage Foundation.

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