Monday, May 15, 2006

Deja Voodoo Economics

The Republicans have been in power for five years and can more or less do what they want, including cutting taxes, without having to invoke faith based economics for their decisions. But as Sebastian Mallaby writes in the Washington Post, they just can't help themselves:
In January, George W. Bush declared that, "by cutting the taxes on the American people, this economy is strong, and the overall tax revenues have hit at record levels." Regrettably, this endorsement of what his dad called voodoo economics was not a one-time oversight. The next month, Bush told a New Hampshire audience, "You cut taxes and the tax revenues increase."
Bush is not alone in this. Dick Cheney, allegedly a serious person, asserted in February that the "tax cuts have translated into higher federal revenues."
To refute this nonsense, Mallaby quotes economist Gregory Mankiw of Harvard, who until recently chaired the Council of Economic Advisers under Bush:
How large, exactly? Mankiw reckons that over the long run (the long run being generous to his argument), cuts on capital taxes generate enough extra growth to pay for half of the lost revenue. Hello, Mr. President, that means that the other half of the lost revenue translates into bigger deficits. Mankiw also calculates that the comparable figure for cuts in taxes on wages is 17 percent. Yes, Mr. President, that means every $1 trillion in tax cuts is going to add $830 billion to the national debt.
Mallaby also refers to a brief but important Congressional Budget Office (CBO) report, titled Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates (discussed here in TommyWonk), to point out the flaws in the tax cut mantra:
On the most optimistic assumptions it could muster, the CBO found that tax cuts would stimulate enough economic growth to replace 22 percent of lost revenue in the first five years and 32 percent in the second five. On pessimistic assumptions, the growth effects of tax cuts did nothing to offset revenue loss.
Was the CBO report penned by the lingering remants of liberal economists hiding out on Capitol Hill? Hardly. Mallaby helpfully points out that the CBO report was written by then-director Douglas Holtz-Eakin, another Bush White House alum.
Update: Fellow blogger Stygius covers the same topic today, concluding with this succinct comment:
Deficit spending increases the deficit. There.
Well said.

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