Wednesday, July 12, 2006

A Penny Cut Is a Penny Spent

Yesterday, President Bush crowed about how his tax cuts somehow generated more revenue for the Federal government. David Wessel of the WSJ succinctly deflated this fantasy:
Do Tax Cuts Pay for Themselves?

Not if you read the fine print in the new White House midsession review of budget trends. "While difficult to estimate precisely," Treasury long-run analyses of the effects of President Bush's tax cuts "may ultimately" raise total national output of goods and services by 0.7%.

So is that enough to pay for the tax cuts, even after allowing them to work their economic magic over the next 10 years? The Center for Budget Policies and Priorities, a Washington think tank and advocacy group that is distinctly unfriendly to Bush fiscal policies, says it isn't. "A 0.7 percent increase in the economic output that the Congressional Budget Office has projected for 2016 would represent an additional $146 billion [in gross domestic product]," it says. "If new revenues equaled as much as 20% of the additional output, the increase in revenues resulting from making the tax cuts permanent (assuming Treasury's best-case assumptions) would be $29 billion."

That's a lot of money. But how does it compare to the size of the president's tax cuts? The congressional Joint Committee on Taxation, using conventional analyses, says making the president’s tax cuts permanent would reduce federal revenues in 2016 by $314 billion. That is more than 10 times what the Treasury analysis suggests tax cuts would generate by prompting more hours of work, more savings and investment and more efficient use of resources.
(Link in the original.)

There's a recent CRS report out that concludes that even when tax cuts are targeted to incentivize savings, the net result is to reduce national savings. The report, Savings Incentives: What May Work, What May Not, finds that:
Most of the government incentives to save come through the tax system. For FY2006, these tax incentives are estimated to cost the U.S. Treasury $125.6 billion in forgone tax revenues — almost 40% of the estimated FY2006 budget deficit. The tax incentives primarily benefit higher-income families because they (1) are more likely to save, and (2) face higher marginal tax rates and thus benefit more from sheltering income from taxation. The tax incentives, however, appear to be relatively ineffective in inducing new saving — many of the families benefitting from the tax incentives likely shifted funds from other saving accounts into the tax-preferred accounts. Consequently, public saving is lower because of the forgone tax revenues due to the tax incentives while personal saving may be only slightly increased at best. In designing pro-saving policies, it is important to consider the aggregate effects of the policies on all components of national savings, both public and private.

The Bush Administration and the President's Advisory Panel on Federal Tax Reform have advocated expanding tax incentives as the primary policy to encourage saving. Personal saving has been shown to be fairly unresponsive to tax incentives, however, and they may substantially decrease public saving (that is, increase the budget deficit). The long-term net effect on national saving is likely negative.
(Emphasis added.)

Of course, all government incentives designed to encourage savings are not created equal. The types of savings that the Bush Administration favors are particularly pernicious:
Both the Bush Administration proposal and the President's Advisory Panel plan shift savings incentives from the front-loaded form to the back-loaded form. Most of the arguments regarding increasing private saving, however, apply to front-loaded savings plans. Back-loaded plans or Roth IRAs eliminate (1) the immediate reward to retirement saving (the tax deduction), and (2) the need to save for future tax liabilities. Consequently, shifting from front-loaded to back-loaded savings approaches may reduce personal savings. In addition, the long-term revenue loss from these proposals could be substantial thus leading to a large reduction in public saving. The result of these savings proposals could be a large reduction in national saving and a reduction in economic growth.
(Footnote omitted, emphasis supplied.)

The bottom line is that Bush Administration tax policies are making us, collectively, poorer. No amount of puffery by the Knave-In-Chief can change this reality.

1 comment:

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