Bush’s tax cuts caused huge government debts… right?

I was reading a post over at Doctor Zero talking about an article written by Arthur Laffer regarding the 2003 Bush tax cuts, claiming that they caused government revenue to rise, not fall. I was suspicious. Everyone knows that the tax cuts were a disaster, that they imploded the federal budget and caused massive debt!

Right?

I was about to post a comment to this effect when I realized that I didn’t actually have any evidence to back up my claim. So I decided to engage in one of my favorite activities: gathering some data and making a graph.

Now, when most people talk about the “Bush tax cuts” they’re typically talking about the 2003 law, JGTRRA, which immediately lowered tax rates. Bush also passed a tax cut in 2001 that would have lowered tax rates in 2006, but apparently five years was too long to wait, so 2003’s JGTRRA basically enacted those future cuts immediately. Thus, the cuts were first experienced in 2003 rather than 2006, as originally intended, and that’s why my graph only shows the 2003 law.

Here’s the graph:

Effect of Bush Tax Cuts.png

Holy cats, it’s true! I’m going to admit that until I compiled this graph, I was a skeptic. I mean, after all, everyone knows that Bush racked up huge deficits, and it’s just so darn counter-intuitive that tax cuts could increase revenue. Yet there it is. The data don’t lie.

Some will surely say that the recession was over by 2003, and that revenues were bound to increase around that time anyway. While this is true, it’s also as true that revenues didn’t fall precipitously as many liberals (including myself, at the time) predicted and believed. One thing is clear: the Bush tax cuts did not cause revenues to fall. The worst you can say is that they caused revenues to rise more slowly then they otherwise would have.

Yet it’s also equally clear from this graph that Bush’s presidency ushered in colossal deficits. So if not the tax cuts, then where did they come from?

The real culprit is just as evident: spending. To what extent the Bush tax cuts increased revenue is debatable, but the degree to which Bush spent money the federal government lacked is not. Bush consistently spent more than the government received in revenue, and he demonstrated no interest whatsoever in belt-tightening when the money dried up like most sensible people do; you can see that the spending curve is constantly positive regardless of revenue.

And let’s not even get started with the titanic gulf between spending and revenues in the 2009 and 2010 budgets. And Obama wonders why people are freaked out about the deficit — just look at this graph!

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3 responses to “Bush’s tax cuts caused huge government debts… right?

  1. Professor Guvinoff

    Getting the tax rate right, that is providing adequate treasury income for minimum tax burden, is in some ways similar to getting you camera lens focused correctly: If you have the good fortune of having found the sweet spot, the picture will degrade regardless of which way you turn the dial: Since the focus was by definition optimal, it can only be degraded by messing with it one way or the other. turning the dial one way or the other and assessing the outcome takes only a few seconds, so getting the focus right is no big deal.

    As far as that goes, the big difference with tax policy is that it takes years instead of seconds to assess the merit, or the demerit, of a given policy change in one direction or the other, assuming that by some miracle, the sweet spot would have been attained. So, it seems reasonable to look back at history to recognize whether the tax policy is generally too heavy or too light:

    When JFK lowered taxes, he was rewarded for his trouble. Same for Reagan, same for GWB. This is a rather reliable indication that the tax rate naturally tends towards overkill unless a special and systematic effort is spent to lighten the rates.

    This is only because we all have a natural tendency towards overkill whenever we can enjoy some distance from the consequences of our choices: For instance, most soldiers might understandably prefer a heavier weapon if they did not have to carry it themselves! Similarly, bureaucrats shielded from the consequences of their choices (I.e. generous benefits regardless of performance…) would most naturally and predictably ask for higher tax rates, since it is easy for them to misunderstand the big system as long as it feeds them and they are not punished for acting with a localized view of their interests. Bottom line: lowering the tax rate is safer than raising it. An added advantage is the “starve the beast” effect: Many government employees would benefit from a shrunk government, because it would open their productive energies to more satisfying and more productive careers. You don’t do anyone any favor by dispensing largesses and ignoring productivity.

    What in the world would be wrong with a smaller and less expensive government? What is American about expecting more by contributing less?

  2. Well said, Professor, and I’ll agree with you on all counts except the “starve the beast” effect. It really depends on which level of government you’re talking about; state and local governments, for example, are very vulnerable to fiscal pressures, but the federal government is extremely insulated. In my time on this earth, all I’ve seen it result in at the federal level is frightening amounts of debt.

    Obviously there’s an upper bound to how much debt can be issued (as Greece recently discovered) but it seems to me like federal fiscal constraints are fairly weak at best, as politicians are able to simply issue bonds or print money to make up for sagging revenues when they want to prop up popular and expensive programs.

    • Professor Guvinoff

      Thanks for inviting me to an impromptu keyboard summit.

      I am reluctant to agree with you, not because I think your observation is incorrect, I don’t, but rather because optimism is one of my pre-existing conditions. I still marvel at George Washington, who could have fallen in the trap of thinking of himself as “The One”, but found the fortitude not to. If we somehow manage to restore the lost respect for our foundational virtues, we may reach a point, not necessarily distant, when the citizenry will demand nothing short of a frontal attack on the rot.

      The question posed by the tea parties might well be “What’s the point of having children, if we don’t know better than to enslave them?” Could it be that the answer is to learn how to tap into the vast reservoir of idealism in the new generations in teaching them the values our schools seem to work so hard at eliminating. Would they not prefer an alternative to cynicism if we show them one?

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