Thursday, July 27, 2006

On Tax Cuts

I think most of the people who read my blog watch CNN or FoxNews and aren't sure what to really believe about Bush's tax cuts and fiscal policies. (Watching CNN and especially C-SPAN probably won't help you).
It's my understanding that people on the "right" say "The tax cuts are good and pay for themselves."
People on the "left" say "The tax cuts are bad and should be allowed to expire."
The real answer is: The tax cuts have been good for the economy, but do not pay for themselves and if the government doesn't ratchet down its spending then eventually taxes will have to increase.

Greg Mankiw (the main proponent/creator of these tax cuts) has re-posted his editorial from the WSJ on his blog. (The most important of these points is #3. Read it and remember it!)

The Treasury Department released its analysis of the 2001 Bush tax cuts and what will happen if they're extended permanently.

So, here's what you should know about the tax cuts:

1. The tax cuts can be credited with a projected 0.7% long-term growth of GNP (gross national product). This is good (not great, but fine). They helped create jobs and GDP is higher than it would have been without the tax cuts.

2. Not all of the tax cuts have promoted growth. Reduction of taxes on capital gains and dividends are good (account for over half of the long-term growth). Cutting the taxes of the top 4 tax brackets has also been good.
These tax reductions affect mostly the "rich," people who invest in stocks.

The tax breaks on the poorer people (child credits and reductions in the marriage penalty) have actually been bad for long-term growth. They were good back in 2001, but in the long-term are bad for U.S. growth.
(No one wants to hear this, including myself).

3. The growth is only going to happen if accompanied by a reduction in government spending(!). A failure to reduce spending will be eventually necessarily accompanied by higher income taxes. If this reduction in spending fails to happen, then it will lead to a 0.9% decrease in GNP.

The moral of the story is that permanent tax cuts are good only if accompanied by a reduction in government spending. NOT if followed by the creation of a new branch of government and the fighting of a war on 2 fronts. Otherwise, the tax cuts have to be financed by higher income taxes which may actually reduce the growth of GNP. "Like all of us, the government eventually has to pay its bills..."

So, now it's our government's choice: Raise taxes, or reduce spending. Which do you think will likely happen?


Eric said...

I applaud your balanced view on things here.
I do agree that action is very necessary. But consider what state the economy would have gone into after 9/11 had the first round of tax cuts not occurred. Irwin Stelzer of the Hudson Institute has just written an article on this in the Daily Standard (reproduced at on this subject and gives the President praise where praise is due. But he criticises the increasingly unequal distribution of wealth, and why, with the economy in good shape and with Americans assuming that it will continue this way, other factors are now becoming more central election issues.

JTapp said...


The linked Treasury report repeats a previous report on the gains from the tax cuts, and how GDP has been at least 2% higher than it would have been without the cuts.

Your linked article is eloquently put.