Mankiw’s Post Defending Tax Cuts

The Mankiw post (and I refuse to link to it – you all know where it is) continues to generate some controversy. This is simplistic, but here’s an alternative look at the numbers. All data from OMB Table 1.3.

In the year 2000, the surplus was 2.4% of GDP, in 2005 the deficit was 2.6% of GDP, for a swing of 5% of GDP. In that time, revenues went from 20.9% of GDP to 17.5%, a change of 3.4% of GDP. Outlays went up from 18.4% of GDP to 20.1% of GDP, or a change of 1.7%.

In other words…. was the bulk of the 5% swing due to a 3.4% change in taxes, or a 1.7% change in outlays? Depends in whose world. In Mankiw’s, only one fifth of the change in the surplus & deficit position was due to cut in taxes, but “that amount is most likely an overestimate.”

Now, many defenders of tax cuts will say… but 2000 was the peak of the bubble. Pick a different year and results are very different. OK. Let’s do that and look at the very different results.

Let’s try 2001. From 2001 to 2005, the surplus to deficit change was 3.9% of GDP. Meanwhile, there was a 2.3% decrease in taxes, and a 1.6% increase in spending.

Let’s try 2002. From 2002 to 2005, the surplus to deficit position deteriorated by 1.1% of GDP. Taxes fell by 0.4%, and revenues increased by 1.1% a year. Outlays increased by “only” 0.7% of GDP. Well… there we go. Here’s a year that works in Mankiw’s favor.

How about 2003? Well… the deficit actually has decreased by 0.9% from 2003 to 2005. In that time, tax collections increased by 1% of GDP and spending increased by 0.1% of GDP.

What about in years before 2000? From 1999 to 2005, the surplus to deficit change was 4% of GDP… taxes fell by 2.5% and spending increased by 1.4% in that period. 1998 was similar.

So… if you pick 2002 as your starting point, Mankiw’s argument seems reasonable. Pick a different year and the story makes little sense. Personally, I think Mankiw either knows all this, or has gone out of his way not to know it. And personally, I think it doesn’t matter… I think Mankiw and other supporters of tax cuts will continue to repeat it their story. And personally, I think we all are helping to encourage that kind of thing by not calling it what I think it is – dishonest hackery.

Update – I’m not sure what is goig on with all the question marks being added in. I’m away from home, and clearly I’m doing somethign different than usual. Apologies.

Update 2 – Ken Houghton pointed out I was missing figures for outlays from 2002 to 2005.