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Study Defends Bush Tax Cuts

by Leroy Baker,, Washington

20 June 2011

In a study, the Tax Foundation (TF) indicates that, if the United States is to reduce its fiscal deficit, it must either accept a level of taxation significantly above historical norms or significantly reduce the expected growth in government spending, which is itself also currently projected to reach a level well above any historical precedent.

A report last month from the Center on Budget and Policy Priorities (CBPP) concluded that the Bush-era tax cuts were the largest cause of rising federal deficits, followed by the economic downturn. However, according to the TF, the CBPP’s analysis paints an incomplete picture by placing only certain budget items in a graph of the deficit out to 2021 as if that demonstrates causality, and that a closer examination could illustrate the relative importance of tax cuts and spending (including spending through the tax code) in creating the projected deficits.

For example, in another report recently issued by the Congressional Budget Office (CBO), in which it compares its projections from 10 years ago to the current reality and scores the budgetary effects of various legislative items, discretionary spending in 2009 exceeded projections by USD417bn, and mandatory spending exceeded projections by USD409bn. This is said to be far greater than the effect of the Bush tax cuts, which only reduced projected revenues in 2009 by USD181bn.

Accordingly, the TF points out that “it would be closer to the truth to say that Bush-era spending rather than Bush-era tax cuts caused the deficit”.

It says that there are also a few points to keep in mind about the sustainability of projected spending and taxation. For example, between now and 2021, public spending as a percentage of gross domestic product (GDP) is projected to hover between 23% and 25%, well above the historical average of 20.8%, and higher than in any year prior to the 2008 financial crisis. In addition, the TF considers that it is quite likely that projected public spending is significantly underestimated due, for example, to the possible growth in Medicare outlays.

On the other hand, if the Bush tax cuts expire as planned in 2012, the CBO projects that individual income tax revenues will be 9.2% of GDP in 2013 and reach 11.2% of GDP in 2021, well in excess of the 40-year historical average of 8.2%. Even if the Bush tax cuts continue, individual income tax revenues will still exceed their historical average, reaching 8.5% of GDP in 2013 and 9.2% in 2021.

In addition, if the Bush tax cuts expire, average total revenues between now and 2021 are projected to be 19.9% of GDP, significantly higher than the historical average of 18%; or at their historical norm if the Bush tax cuts continue.

The TF therefore concludes that the CBO’s data provides two critical facts which should form the basis of any future budget debate. While tax revenues are projected to remain close to their normal relationship to GDP, with or without expiration of the Bush tax cuts in 2012, public spending, on the other hand, has roughly doubled in the last 40 years as a percentage of GDP, and is projected to remain there through 2021, pushing total spending well above any historical precedent.

TAGS: individuals | tax | economics | fiscal policy | United States | revenue statistics | individual income tax

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