Brian Riedl’s Myths 2 and 4
I’m getting a lot of mail from readers. Seems Riedl’s post has stirred up a hornet’s nest. I will be happy to post some replies from our readers. I didn’t intend to post any that covered more than one Riedl myth at a time, but this one seems to do it well…
Reader alkali19 (e-mail – his/her name, plus a g-mail period com) sends this, adapted from some comments he/she posted at Matthew Yglesia’s site site.
Myth #2: The Bush tax cuts substantially reduced 2006 revenues and expanded the budget deficit.
Fact: Nearly all of the 2006 budget deficit resulted from additional spending above the baseline.
“The best way to measure the swing from surplus to deficit is by comparing the pre–tax cut budget baseline of the Congressional Budget Office (CBO) with what actually happened. … [In 2006,] 90 percent of the swing from surplus to deficit resulted from higher-than-projected spending, and only 10 percent resulted from lower-than-projected revenues.”
That result also appears to be unique to 2006. Here is that same analysis presented over all of 2002-2006. (The first column is the percentage of change from baseline resulting from higher spending, the second is the percentage resulting from lower revenues.)
2002 34% 66%
2003 35% 65%
2004 42% 58%
2005 65% 35%
2006 90% 10%
Total 54% 46%
In short, if you don’t look at just 2006, it’s clear that revenue shortfalls are responsible (under Riedl’s metric) for just under half of the deficits versus baseline.
Just out of curiosity, I stripped out Iraq war spending for 2003 through 2006 and re-ran the analysis for those years:
2003 29% 71%
2004 34% 66%
2005 58% 42%
2006 88% 12%
Total 50% 50%
Note: here is a spreadsheet showing my calculations.
Comment re: Myth 4
Myth #4: Capital gains tax cuts do not pay for themselves.
Fact: Capital gains tax revenues doubled following the 2003 tax cut.
That result depends on the the unusual variability of capital gains tax receipts. Here are capital gains tax revenues for 2006 and the last 10 years (in billions, per CBO):
(Riedl’s analysis appears to be based on the figures with asterisks.)
We know that the economy did not double in size between 2003 and 2006 — it grew at about 2.5% per year in real dollars. So what we are seeing here is mostly the fact that capital gains taxes vary a lot by reason of the business cycle, not any great macroeconomic lesson about how capital gains taxes supposedly pay for themselves. There’s no reason to think that if capital gains taxes had been left alone in 2003, capital gains tax receipts in 2006 wouldn’t have been something more like $134b.
(Amusingly, this Myth #4 immediately follows Myth #3: Supply-side economics assumes that all tax cuts immediately pay for themselves. Fact: It assumes replenishment of some but not necessarily all lost revenues. Alas, the supply-siders just can’t resist the temptation.)