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Auditing a Republican tax myth

Adam Newman | Monday, October 3, 2011

In 2001 and 2003, President George W. Bush and Congressional Republicans passed the “Bush Tax Cuts,” massive tax cuts that were completely financed by debt. Ironically, Republicans (who today rail against increasing the deficit) support the Bush Tax Cuts and want to see them made permanent when they expire at the end of 2012. Republicans justify this contradictory position because they believe tax cuts generate enough tax revenue through increased economic growth to make up for the lost revenue from the initial cuts. As a result, Republicans believe tax cuts decrease the deficit instead of increase the deficit. This position is better known as “tax cuts pay for themselves.” Even though the belief that tax cuts pay for themselves is scripture to many Republican politicians, it doesn’t hold up under closer scrutiny.

While it is not hard to find Republican politicians who believe the Bush Tax Cuts pay for themselves (George W. Bush, Dick Cheney, John McCain and Rudy Giuliani are just a few examples), it is also not hard to find former Bush Administration officials who say the opposite. Henry Paulson, President Bush’s Secretary of Treasury, testified during his Senate confirmation hearing in 2006, “As a general rule, I do not believe that tax cuts pay for themselves.” Ed Lazear, a former chairman of President Bush’s Council of Economic Advisors (CEA) testified in a 2006 Senate hearing, “As a general rule, we do not think tax cuts pay for themselves.” Andrew Samwick, a former chief economist on President Bush’s CEA, wrote in 2007, “No thoughtful person believes that this possible offset (from the Bush tax cuts) more than compensated for the first effect for these tax cuts. Not a single one.”

If tax cuts don’t pay for themselves, then for how much do they pay? One notable 2005 study conducted by economist N. Gregory Mankiw (another former Chairman of the CEA in the Bush Administration) found the average payroll tax cut pays for 17 percent of its cost, and the average capital gains tax cut pays for 50 percent of its cost. There are many varied estimates as to how much the Bush Tax Cuts covered their cost, but no credible analysis has concluded that the Bush Tax Cuts fully paid their cost. Even the right-leaning Heritage Foundation estimated that the Bush Tax Cuts only paid for 30 percent of their cost.

Republicans commonly point out that tax revenue rose annually (in current dollars) after the full implementation of the Bush Tax Cuts in 2003 through 2007. They use this as evidence that the Bush Tax Cuts paid for themselves, since tax revenue increased after taxes were cut. This is misleading, however, because even though tax revenue may have rose during this period, revenue would have been much higher if the Bush Tax Cuts were never passed.

The non-partisan Congressional Budget Office (CBO) projected that if the Bush Tax Cuts had not passed, tax revenue from 2002 to 2011 would have been $1.5 trillion higher. Alan Viard (yes, another former economist on President Bush’s CEA) in an interview with politifact.com noted the consensus of this fact, “Revenue is lower than it would be without the Bush Tax Cuts — liberal and conservative economists are in accord on this question.”

Republican support for the Bush Tax Cuts also reveals a troubling hypocrisy: Republicans vehemently oppose any increase to the deficit, unless it is for a tax cut. For the past two years, Republicans have opposed deficit spending sponsored by Democrats, even for critical investments like infrastructure, scientific research and education. At the same time though, Republicans worked to make the Bush Tax Cuts permanent, a move that the CBO projects will add as an additional $3.8 trillion to the national debt over the next decade. In 2012 alone, the Bush Tax Cuts will add $300 billion to the deficit, roughly one fourth of the projected 2012 deficit. If the Republicans were really as serious as they say they are about reducing the deficit, they would support a full repeal of the Bush Tax Cuts.

Even though debating tax policy is as exciting as watching paint dry, it is a crucial debate in which our society must engage. Otherwise, the Bush Tax Cuts will continue to increase the deficit and Republican politicians will continue to have the audacity to say that they don’t. There is a very real possibility Republicans will win control of the White House and Congress in 2012 and thus have an opportunity to pass massive tax cuts on the principle “tax cuts pay for themselves.” If this happens, Americans will deserve the bad policy these tax cuts create, but the next generation of Americans who will bear the cost of these tax cuts will not.

Adam Newman is a junior finance

major. He can be reached at

[email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.