September 15, 2004
The two arguments used to create the initial President
George W. Bush tax cuts were that the economy might need support (which
proved to be absolutely correct) and that budget surpluses would total $5.6
trillion over the next ten years.
In fact, deficits of nearly a trillion dollars occurred
in the initial three full fiscal years of Bush’s tenure. Furthermore, the Congressional Budget Office (CBO) has just
released projections that deficits will be an additional $2.3 trillion in
the next ten years based upon existing law.
Probably the silliest testimony presented by a Federal
Reserve Chairman was when Alan Greenspan discussed in 2001 how monetary
policy could be implemented by purchasing and selling corporate debt
instruments if the supply of federal bonds ran short.
The use of corporate bonds was not silly, but the prospect of running
out of government bonds certainly was.
I have discussed in earlier columns some of the reasons
for this huge forecast error. For
example, the Bush budget office assumed that the 1.81 percent yield in
personal taxes for every percent gain in economic growth that occurred in
the last five years of the Clinton administration would persist in the Bush
Of course, those tax yields were boosted by capital
gains, which quickly disappeared in 2001.
(Most economists knew that a more reasonable yield was 1.15 percent
for every percentage point of growth.)
Also, interest payments were expected to continue
declining as the virtuous cycle of falling debt lowered that source of
expenditures. In fact, interest
rates are now rising and we are holding an additional $1 trillion in debt. Increasing interest payments by the federal government in the
next four years will exceed all the dollars spent so far on the war on
terrorism (more than a quarter trillion dollars).
recession and the war on terrorism clearly contributed to the deficits, no
economist would have assumed that after a decade without a recession we
could continue recession free for another decade.
Therefore, a recession should have been built into that surplus
estimate and substantially lower it. So,
the absence of growth cannot be an excuse for the forecasting error.
(In fact, strong productivity gains have increased the
capacity to grow by more than expected in 2001.)
Moreover, the CBO’s additional deficit projections
are based upon the assumption that tax cuts will be lost in a sunset by 2011
or sooner. If the tax cuts are
made permanent, as the President has pledged in his re-election campaign,
the deficits in the next decade could be more than $2 trillion higher.
Some people say that supporting the President in making
these tax cuts permanent is a “no-brainer.”
I guess that means you have no brain in making that statement.
If our economy currently needs tax cuts to preserve
economic growth, then why is the Federal Reserve raising interest rates?
Clearly we are not facing a structural surplus in federal revenues, as the
Bush administration averred in 2001.
I believe the tax cuts limited the magnitude of the
recession. However, the
policies used to boost an economy are not the same as those that preserve
So what are the arguments for making the tax cuts
The only sound one I see is that by not preserving
these new tax codes, even if they lead to very large structural deficits, we
will remove stimulus from the economy.
If the economy is slowing below sustainable rates of growth, such a
removal of tax cuts is not desirable. Should
we assume that the administration believes that the recovery cannot be
sustained without continuing the intravenous drip of tax cuts?
Before ending, I must address the Wall Street
Journal’s editorial that praised the same CBO study for indicating that
this year’s deficit is lower than originally projected.
Moreover, they mention that the deficits will end before the ten year
period is over. Thus, no
structural deficit exists.
In fact, I was surprised by the continuing inability to
forecast tax yield. In their
initial forecasts for deficits this year, the administration assumed no
capital gains would occur. That
is as bad as assuming capital gains would maintain their 1996-2000 results
through the next decade. Should
we laud faulty forecasts?
Also, those deficits vanish only if the tax cuts are
not made permanent. Even then,
they only vanish if private savings accounts are not initiated for young
contributors to social security and if current interest rates do not rise.
Furthermore, they only vanish for a few years until medicare cash
accumulations disappear a couple of years later.
There is a structural revenue deficit. The economy does not need further boosts from tax cuts at this time. So why is it good economic policy to preserve this structural deficit by making the tax cuts permanent?