Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Tuesday, October 17, 2006

A Good Story About the Deficit from the Washington Post

A lousy headline--there is no "debate" over tax cuts' role in lower deficits. And a lousy headline ruins at least two-thirds of the good that a reporter can do. But reporter Lori Montgomery does good: she finds thoughtful people with credible points of view and tells their stories. Belle Sawhill, Robert Carroll, Alan Viard, and Douglas Holtz-Eakin are all good people interested in raising the level of the debate:

Lower Deficit Sparks Debate Over Tax Cuts' Role - washingtonpost.com: By Lori Montgomery: With great fanfare, President Bush last week claimed credit for a striking reversal of fortune: New figures show the federal budget deficit shrinking by 40 percent over the past two years.... Bush hailed the dwindling deficit as a direct result of "pro-growth economic policies," particularly huge tax cuts enacted during his first term. "Tax relief fuels economic growth. And growth -- when the economy grows, more tax revenues come to Washington. And that's what's happened," Bush said.

Economists said Bush was claiming credit where little is due. The economy has grown... but the Bush tax cuts played a small role in that process... and cost the Treasury more in lost taxes than it gained from the resulting economic stimulus. "Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute. "It's logically possible" that a tax cut could spur sufficient economic growth to pay for itself, Viard said. "But there's no evidence that these tax cuts would come anywhere close to that."

Economists at the nonpartisan Congressional Budget Office and in the Treasury Department have reached the same conclusion.... Robert Carroll, deputy assistant Treasury secretary for tax analysis, said neither the president nor anyone else in the administration is claiming that tax cuts alone produced the unexpected surge in revenue. "As a matter of principle, we do not think tax cuts pay for themselves," Carroll said. But, he said, "we do think good tax policy can lead to important economic benefits. . . . The size of the tax base is larger than it would have been without the tax relief."

The subtleties of that argument have been lost on the campaign trail.... [E]ager to talk about something other than the House page scandal and mounting casualties in Iraq... Speaker J. Dennis Hastert (R-Ill.) claimed credit for "driving down the deficit" and accused Democrats of plotting to roll back the tax cuts....

Democrats... pointed to CBO projections that the deficit will rise again next year and balloon in coming decades as 78 million retiring baby boomers make claims on Social Security and Medicare. "The truth is that the administration's fiscal policies have failed," said Sen. Kent Conrad (N.D.), the senior Democrat on the Senate Budget Committee. "They have not benefited most Americans. They have dramatically worsened our long-term budget outlook. And they are putting our fundamental economic security at risk."...

If growth induced by Bush's cuts doesn't explain the surge, where did all those extra tax dollars come from?The short answer is spectacularly high corporate profits and the advancing fortunes of wealthy Americans, economists said.... A robust economy and a strong stock market deserve the bulk of the credit, the economists said, but tax collections are growing far faster than the economy as a whole, so those factors cannot completely explain the Treasury's good fortune.... "The money flowed in in a way that no one expected," said Douglas Holtz-Eakin, a former Bush White House economist who retired last year as CBO director. "Good economic growth is not the surprise. The surprise is that profits as a whole are so much higher."... Holtz-Eakin and other economists said they can only speculate about why that economic growth generated a disproportionate jump in revenue.... "The simplest way to think about it, I think, is we know we have growing income inequality, especially at the top," said Isabel V. Sawhill, a Brookings Institution economist who worked for the Clinton administration. "The very rich are pulling away from the ordinary rich and the middle class. Those very rich people pay higher tax rates. When the distribution of income shifts upward, as it has in recent years, you get a revenue kicker from that."

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