Bush's Treasury admits that tax cuts aren't free

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Slate
http://www.slate.com/id/2146868/

the dismal science: The search for better economic policy.

The Last Laffer
Bush's Treasury admits that tax cuts aren't free.

By Jason Furman
Posted Monday, July 31, 2006, at 1:16 PM ET

In Washington, as in fairy tales, be careful what you wish for. In a February speech, Vice President Cheney said, "It's time to re-examine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy." Calling for "dynamic analysis" or "dynamic scoring" can be supply-side code language for the view that tax cuts pay for much or all of themselves through stronger economic growth. Cheney proposed creating a new unit within Treasury to conduct this dynamic analysis and confidently predicted that it would find that tax cuts increase government revenues.

Six months later, Treasury's first dynamic analysis of the president's policies is out. It belies the claim that the Bush proposal to make his tax cuts permanent will either pay for itself or galvanize the economy.

There has long been a conflict between responsible conservative economists who make carefully hedged claims about the relatively modest economic effects of tax cuts and Laffer curve lovers, who think that tax cuts always spur enormous gains. And lately, emboldened by the large jump in tax revenues in 2005 and 2006 (and conveniently overlooking the nearly unprecedented three consecutive years of declining tax revenues that preceded it), Laffer disciples have widened their separation from mainstream economists into a chasm.

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In place of a false choice of tax cuts magically paying for themselves and not costing anything, the Treasury offered a very real and painful one: The tax cuts need to be paid for by "either cutting future government spending or raising future taxes." And even if you take the path of cutting government programs—which is not the path the country is on today—Treasury found only minuscule economic effects from the tax cuts: a mere 0.7 percent increase in the size of the economy after many years.

To put that number in perspective, averaged over 20 years, an increase in the economy of 0.7 percent is equivalent to a 0.04 percent increase in the average annual growth rate. So, instead of limping along at a mere 3 percent growth rate, the economy would charge ahead at a 3.04 percent growth rate.