By Brian Riedl
President Obama and Congressional Democrats are blaming their trillion-dollar budget deficits on the Bush tax cuts of 2001 and 2003. Letting these tax cuts expire is their answer. Yet the data flatly contradict this tax cuts caused the deficits narrative. Runaway government spending not declining tax revenues is the reason the U.S. faces dramatic budget shortfalls for years to come.
Consider the three most persistent myths:
• The Bush tax cuts wiped out last decades budget surpluses.
Sen. John Kerry (D. Mass.) for example has long blamed the tax cuts for having taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see. That $5.6 trillion surplus never existed. It was a projection by the Congressional Budget Office (CBO) in January 2001 to cover the next decade. It assumed that late-1990s economic growth and the stock-market bubble (which had already peaked) would continue forever and generate record-high tax revenues. It assumed no recessions no terrorist attacks no wars no natural disasters and that all discretionary spending would fall to 1930s levels.
The projected $5.6 trillion surplus between 2002 and 2011 will more likely be a $6.1 trillion deficit through September 2011. So what was the cause of this dizzying $11.7 trillion swing? Ive analyzed CBOs 28 subsequent budget baseline updates since January 2001. These updates reveal that the much-maligned Bush tax cuts at $1.7 trillion caused just 14 of the swing from projected surpluses to actual deficits (and that is according to a static analysis excluding any revenues recovered from faster economic growth induced by the cuts).
The bulk of the swing resulted from economic and technical revisions (33) other new spending (32) net interest on the debt (12) the 2009 stimulus (6) and other tax cuts (3). Specifically the tax cuts for those earning more than $250000 are responsible for just 4 of the swing.
If there were no Bush tax cuts runaway spending and economic factors would have guaranteed more than $4 trillion in deficits over the decade and kept the budget in deficit every year except 2007.
• The next decades deficits are the result of the previous administrations profligacy.
Mr. Obama asserted in his January State of the Union Address that by the time he took office we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars two tax
cuts and an expensive prescription drug program.
In short its all President Bushs fault. But Mr. Obamas assertion fails on three grounds.
First the wars tax cuts and the prescription drug program were implemented in the early 2000s yet by 2007 the deficit stood at only $161 billion. How could these stable policies have suddenly caused trillion-dollar deficits beginning in 2009? (Obviously what happened was collapsing revenues from the recession along with stimulus spending.)
Second the presidents $8 trillion figure minimizes the problem. Recent CBO data indicate a 10-year baseline deficit closer to $13 trillion if Washington maintains todays tax-and-spend policieswhereby discretionary spending grows with the economy war spending winds down ObamaCare is implemented and Congress extends all the Bush tax cuts the Alternative Minimum Tax (AMT) patch and the Medicare doc fix (i.e. no reimbursement cuts).
Under this realistic baseline the 10-year cost of extending the Bush tax cuts ($3.2 trillion) the Medicare drug entitlement ($1 trillion) and Iraq and Afghanistan spending ($515 billion) add up to $4.7 trillion. Thats approximately one-third of the $13 trillion in baseline deficitsfar from the majority the president claims.
Third and most importantly the White House methodology is arbitrary. With Washington set to tax $33 trillion and spend $46 trillion over the next decade how does one determine which policies caused the $13 trillion deficit? Mr. Obama could have just as easily singled out Social Security ($9.2 trillion over 10 years) antipoverty programs ($7 trillion) other Medicare spending ($5.4 trillion) net interest on the debt ($6.1 trillion) or nondefense discretionary spending ($7.5 trillion).
Theres no legitimate reason to single out the $4.7 trillion in tax cuts war funding and the Medicare drug entitlement. A better methodology would focus on which programs are expanding and pushing the next decades deficit up.
• Declining revenues are driving future deficits.
The fact is that rapidly increasing spending will cause 100 of rising long-term deficits. Over the past 50 years tax revenues have deviated little from their 18 of gross domestic product (GDP) average. Despite a temporary recession-induced dip CBO
projects that even if all Bush tax cuts are extended and the AMT is patched tax revenues will rebound to 18.2 of GDP by 2020slightly above the historical average. They will continue growing afterwards.
Spendingwhich has averaged 20.3 of GDP over the past 50 yearswont remain as stable. Using the budget baseline deficit of $13 trillion for the next decade as described above CBO figures show spending surging to a peacetime record 26.5 of GDP by 2020 and also rising steeply thereafter.
Putting this together the budget deficit historically 2.3 of GDP is projected to leap to 8.3 of GDP by 2020 under current policies. This will result from Washington taxing at 0.2 of GDP above the historical average but spending 6.2 above its historical average.
Entitlements and other obligations are driving the deficits. Specifically Social Security Medicare Medicaid and net interest costs are projected to rise by 5.4 of GDP between 2008 and 2020.
The Bush tax cuts are a convenient scapegoat for past and future budget woes. But it is the dramatic upward arc of federal spending that is the root of the problem.
Mr. Riedl is a research fellow at the Heritage Foundation.
