Monday, January 02, 2006

CBO: Tax Cut Wouldn't Pay for Itself

The Congressional Budget Office last month released a report that concludes that a 10% cut in personal income tax rates would not increase revenues. Imagine that! The report, Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates, uses a broad range of assumptions to estimate the offset to lost revenue due to increased economic activity:
Under various assumptions, the supply-side economic effects of the tax cut are estimated to offset between 1 percent and 22 percent of that revenue loss over the first five years.
To state this as clearly as possible, any future tax cut would be funded by increasing the deficit or reducing government spending, which has soared over the last five years. Realistically, this means that tax cuts would be funded by increased borrowing on the part of the federal government.
How important is this analysis? Daniel Altman, writing in the New York Times, assserts that the report's brevity belies its importance:
At a modest seven pages, it didn't elicit the same sort of interest as the budget office's budgetary and economic outlooks. Yet it may be one of the most important government publications in years.
This report, which should be required reading for members of Congress, will likely be ignored. But we can return to this analysis next time we hear the argument that tax cuts pay for themselves, which I suspect we will before long.

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