The Daily Hatch

Big news on capital hill today is that President Obama has cut a deal with the Republicans concerning the extention of the Bush Tax Cuts and that has some liberals in Arkansas hopping mad.

In 1981 when I was in college, I got to hear the famous economist Arthur Laffer speak about the notorious Laffer Curve that Ronald Reagan had been touting leading up to the passage of his massive tax cuts of 1981. Simply put the Laffer curve is the curved graph that illustrates the theory that, if tax rates rise beyond a certain level, they discourage economic growth, thereby reducing government revenues.

It was exciting to me that the economic theory that ringed true to me because of the Kennedy Tax cuts in the 1960’s would be tested again with the 1981 Reagan Tax Cuts and now can be applied to the Bush Tax Cuts. We don’t have to argue about economic theory that has never been tested but we can simply look at history.

Max Brantley on Dec 6th posted these words from Paul Krugman of the NY Times: “America, however, cannot afford to make those (Bush Tax) cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade…”

Ernest Dumas in the article “Politics, Tax Policy Converge,” states, “What about the deficit, the horror that is driving voter rage this year? The Republican plan to extend all the tax cuts forever would add $4 trillion to the national debt over the next decade.”

Gene Lyons in his article “Sure, the Government is just like your Family,” (Nov 22), states, “The current deficit’s almost entirely a product of two things: the Bush tax cuts and the recession.”

NOTICE TO LIBERALS: The increase in spending has been the real problem the last ten years and will be the next ten years. Not the tax cuts.

I am responding to these assertions with a portion from an article published January 29, 2007 called, “Ten Myths About the Bush Tax Cuts” by Brian Riedl. Riedl is the Grover Hermann Fellow in Federal Budgetary Affairs at the Heritage Foundation and holds a bachelor’s degree in economics and political science from the University of Wisconsin, and a master’s degree in public affairs from Princeton University.

Myth #5: The Bush tax cuts are to blame for the projected long-term budget deficits.
Fact: Projections show that entitlement costs will dwarf the projected large revenue increases.

The unsustainability of America’s long-term budget path is well known. However, a common misperception blames the massive future budget deficits on the 2001 and 2003 tax cuts. In reality, revenues will continue to increase above the historical average yet be dwarfed by historic entitlement spending increases.

For the past half-century, tax revenues have generally stayed within 1 percentage point of 18 percent of GDP. The CBO projects that, even if all 2001 and 2003 tax cuts are made permanent, revenues will still increase from 18.4 percent of GDP today to 22.8 percent by 2050, not counting any feedback revenues from their positive economic impact. It is projected that repealing the Bush tax cuts would nudge 2050 revenues up to 23.7 percent of GDP, not counting any revenue losses from the negative economic impact of the tax hikes.

In effect, the Bush tax cut debate is whether revenues should increase by 4.4 percent or 5.3 percent of GDP.

Spending has remained around 20 percent of GDP for the past half-century. However, the coming retirement of the baby boomers will increase Social Security, Medicare, and Medicaid spending by a combined 10.5 percent of GDP. Assuming that this causes large budget deficits and increased net spending on interest, federal spending could surge to 38 percent of GDP and possibly much higher.

Overall, revenues are projected to increase from 18 percent of GDP to almost 23 percent. Spending is projected to increase from 20 percent of GDP to at least 38 percent. Even repealing all of the 2001 and 2003 cuts would merely shave the projected budget deficit of 15 percent of GDP by less than 1 percentage point, and that assumes no negative feedback from raising taxes. Clearly, the French-style spending increases, not tax policy, are the problem. Lawmakers should focus on getting entitlements under control.