Tax Cuts Don’t Payment for Themselves

Richard Kogan and Aviva Aron-Dine recently put forth CLAIM THAT TAX CUTS “PAY FOR THEMSELVES” IS TOO GOOD TO BE TRUE: Data Show No “Free Lunch” Here:

In recent statements, the President, the Vice President, and key Congressional leaders have asserted that the increase in revenues in 2005 proves that tax cuts “pay for themselves.” In other words, the economy expands so much as a result of tax cuts that it produces the same level of revenue as it would have without the tax cuts … In fact, however, the evidence tells a very different story: the tax cuts have not paid for themselves, recent economic growth and revenue growth have not been particularly strong, and revenues remain lower than had been predicted before the tax cuts were enacted.

Angrybear readers are likely very aware of the basic case made by this paper, but the authors do a very nice job of presenting the evidence.

(Hat tip to AB reader thebhc)

James Hamilton has more as he explores two of the usual supply-side claims followed by this comment on the aggregate demand angle:

We are then left then with the third argument, which is that the budget deficits may be serving to stimulate aggregate demand. Such a claim would in my opinion be accurate. However, the question is whether stimulating consumption spending is a desirable policy goal at this point in the business cycle. I believe that our big concerns at the moment should be reducing the trade deficit and increasing national saving, both of which goals are undermined by a big federal deficit. And it surely makes no sense for Congress to be doing its best to stimulate aggregate demand while the Federal Reserve is determined to reduce aggregate demand.

It does seem that 2006 will resemble the 1966 credit crunch when fiscal stimulus was matched by monetary restraint. On the two supply-side claims, Dr. Hamilton simply notes that labor force participation has declined since 2000 and the ratio of personal savings as a percent of GDP is quite low.