TAX CUTS DO NOT PAY FOR THEMSELVES

Conservative pundits are countering assertions that in the wake of Bush's proposal for $200 billion to be spent on Hurricane Katrina reconstruction, the president's tax cuts should be rescinded or allowed to sunset, in particular the repeal of the estate tax, by arguing that Bush's tax cuts have stimulated the economy and enabled this fantastic prosperity that we're all supposed to be enjoying (what planet do these guys live on, anyway?). The result, they say, is MORE revenue generated for federal coffers, not less.

The fact is, that's sheer bunk. "The recent growth in revenues simply means that the large revenue shortfall is not quite as severe as previously thought. While revenues in 2005 will be significantly higher than revenues in 2004, a point that proponents of the tax cuts have begun to trumpet, revenues in 2004 were at a stunningly low level — the lowest level as a share of the economy since 1959."
...
"No reputable economist, liberal or conservative, has ever shown that tax cuts pay for themselves, and economists are virtually unanimous in concluding that tax cuts reduce revenue. This consensus holds even among economists who have served at high levels in the Bush Administration.

"For example, N. Gregory Mankiw, chairman of the President’s Council of Economic Advisers during the President Bush’s first term, wrote in his popular introductory economics textbook that there is “no credible evidence” that tax cuts pay for themselves, and that an economist who makes such a claim is a “snake oil salesman who is trying to sell a miracle cure.”

Data from the CBO report that:

(1) A surge in economic growth is not behind the unexpected increase in 2005 revenues. "CBO stresses that much of the recent growth of revenues has occurred because of a boom in corporate tax receipts rather than in taxes on wages and salaries."

(2) The recent revenue rebound has not made up for the large revenue shortfalls that have developed since 2000. "The recent increase in revenues follows three consecutive years (2001-2003) in which revenues declined in nominal terms, an extremely rare occurrence, and a year (2004) in which revenues were lower as a share of the economy than in any year since 1959. Even with the recent increase, revenues in 2005 will remain well below the levels at which they were projected to be when the 2001 tax cut was enacted."

(3) Many of the factors behind the increase in revenues in 2005 are temporary. "The expiration of a business tax cut at the end of 2004 is leading to an increase in tax collections of about $50 billion this year, according to past estimates by the Joint Committee on Taxation. In this case, the increase in revenue stems from the termination of a tax cut, not from a tax cut’s effect in spurring the economy...The corporate tax legislation enacted last October contained a provision (relating to profits that U.S. companies have earned abroad and kept overseas) that was designed to produce a one-time gain in revenues this year. The one-time gain will be followed by revenue losses in subsequent years. Another contributing factor is higher-than-expected inflation, which generates higher revenues. To the extent that 2005 and future revenues are higher because of higher inflation, this growth would be largely offset in later years by higher expenditures."

(4) Federal revenues remain low as a share of the economy, and the long-term fiscal outlook remains grim. "CBO’s new report reveals that revenues will fall as a percent of the economy after 2006, assuming that the tax cuts enacted since 2001 and current AMT relief are extended."

(5) The increase in revenues does not confirm the “Laffer Curve;” tax cuts do not pay for themselves. "Revenue collections grew much more robustly in the 1990s — when taxes were increased — than in the 1980s, when taxes were cut sharply. Not coincidentally, the nation’s fiscal position improved substantially in the 1990s, after deteriorating in the 1980s."

UPDATE: Beth Shulman has a relevant article in Tom Paine: "Trickling Up."