On January 7th, President Bush released a tax cut plan estimated to
cost $674 billion. This followed the release of an alternate tax cut
plan by the Democrats that was estimated to cost $136 billion. The
next day, Rush Limbaugh posted an article about the two plans titled
'Which Plan Really "Costs" More?'. It can be seen on his site at:
http://www.rushlimbaugh.com/home/daily/site_010803/content/truth_detector.guest.html
Rush starts off the article by stating:
> One of the ways the media is attempting to spin the debate over
> President Bush's tax relief plan is by focusing on "cost." Nobody
> seems to be concerned about the economy, anymore. They're only
> concerned about the deficit - which is the smallest percentage of
> Gross Domestic Product ever - and the claim that the Democrat plan
> "costs" $136 billion and Bush's "costs" $674 billion.
It's hard to figure out where Rush got the claim that the deficit
"is the smallest percentage of Gross Domestic Product ever". The
graph and tables at http://home.netcom.com/~rdavis2/deficits.html
are based on numbers from the most recently released U.S. Budget.
As can be seen, the Unified Deficit (this is the deficit reported by
the government) was estimated to be 1.0 percent of GDP in 2002. This
is the largest deficit since the deficit of 1.4 percent of GDP in
1996. Perhaps Rush was referring to the 2001 surplus which was 1.3
percent of GDP. The trouble is, there were larger surpluses in 1999
and 2000 (and, for that matter, 1951). Perhaps Rush was referring to
the public debt. It did reach a recent low of 32.7 percent of GDP in
2001. The trouble is, it was lower for the 14 years from 1969 through
1982, reaching a low of 23.8 percent of GDP in 1974. These numbers
can be seen at http://home.netcom.com/~rdavis2/debt40.html. Perhaps
Rush just needs to check his numbers more carefully, especially when
using the word "ever".
Rush goes on to say that, due to the flaws of static analysis, no
person can give you an accurate answer as to which plan costs more.
Then he explains why tax cuts aren't really a "cost". Finally, he
states that the Bush plan will increase revenues up to the $674
billion price tag such that there is no cost and "bye-bye deficit!".
This final assertion seems somewhat in conflict with the first two.
In any case, saying "bye-bye deficit" will require revenues to
increase by $674 billion above what they would be otherwise PLUS
enough to cover the already existing deficit. Rush continues:
> If it brings in, say, two dollars for every dollar of tax relief,
> we'll have more money in the treasury - and thus safeguard programs
> like Social Security! The idea behind tax cuts is to get the economy
> to grow. The economy is not static. The pie is not one size forever,
> with no new slices. The object is to grow so we have more people
> working and paying taxes. Presidents Kennedy and Reagan proved this
> with their tax cuts. The Democratic Congress spent every new dollar
> and more that Reagan brought in, but the fact is that the revenue
> coming into the treasury nearly doubled over his two terms.
The argument that the near-doubling of revenues during Reagan's two
terms proves the value of tax cuts is an old argument. It's also
extremely flawed. The growth of receipts by source, outlays, and GDP
over every 8-year period since 1940 is shown in the graph and tables
at http://home.netcom.com/~rdavis2/recgrow.html. As can be seen in
the first table, total receipts increased 75.84 percent from 1980 to
1988. However, this was the slowest 8-year growth rate since a 75.62
percent growth in total receipts from 1963 to 1971. Of course, these
results are likely skewed by the high inflation that occurred during
the 70's. Hence, it makes more sense to look at the "real" growth
rates, that is, the growth rates corrected for inflation. The second
table shows that the real growth rate from 1980 to 1988 was 20.72%.
The 8-year growth rates increased in the following years to a high of
33.11% from 1983 to 1991. However, the real growth rate of total
receipts reached higher highs of 38.15% in 1971 to 1979 and 57.02%
from 1992 to 2000.
Another serious flaw in the doubling of revenues argument is that it
looks at all revenues. The FICA tax rate increased from 6.13 percent
in 1980 to 7.51 percent in 1988. To include an increase in revenues
gained through a tax hike in order to argue in favor of tax cuts
would be the height of hyprocrisy. Hence, we need to look only at
revenues obtained from individual income taxes. According to the
second table, the real growth in individual income tax receipts was
12.84% from 1980 to 1988 and 13.80% from 1981 to 1989. These were
the lowest growth rates of any of the 55 8-year spans from 1940 to
2002 except for four. These four 8-year spans were 1952 to 1960
(9.12%), 1953 to 1961 (7.72%), 1968 to 1976 (11.61%), and 1969 to
1977 (3.28%). The highest real growth rate was 78.55% from 1992 to
2000, following the 1993 tax hike.
Hence, the evidence is that the Reagan tax cuts DECREASED revenues
over what they would have been, at least over the short (8-year)
term. The only remaining argument in favor of the Reagan tax cuts,
at least from a revenue point of view, would seem to be that they
permanently raised the level of the GDP, thus bringing in slightly
higher revenues far into the future. According to the graph and
second table, the GDP reached a high 8-year growth rate of 34.3% from
1982 to 1990. However, the GDP seems to have reaching a similar high
about every ten years over the past several decades. It reached a
high of 41.57% from 1958 to 1966, 29.20% from 1971 to 1979, and
32.58% from 1992 to 2000. Hence, these figures don't provide any
strong evidence that the Reagan tax cuts permanently affected the
GDP one way or the other. In any case, Rush concludes:
> Similarly, if the Democrat plan, at $136 billion, causes no
> increased activity in the economy because it's nothing but one-time
> tax rebates instead of cuts and a huge pile of cash to state
> governments, then, yep, it's a cost. The Bush plan alone offers
> genuine stimulus to put money in your pocket every year for the
> next ten years. Since 70% of the economy is consumer spending, that
> extra cash is going to make the economy boom - which is the last
> thing the Democrats want to see. After all, they're banking on a
> losing economy to propel them back into power in 2004. Nice guys,
> huh?
I can't speak for other consumers but I currently have no plan to
spend any tax cut I receive. It seems to me that our government
currently lacks the ability and/or will to deal with the growing
deficits and the expense of the approaching Boomer retirement. On
this latter issue, the most recent U.S. Budget projects that
mandatory spending will take up all projected revenues by 2075 (see
http://home.netcom.com/~rdavis2/probud.html). If this happens, some
yet undefined tax hikes and/or benefit cuts will have to be
implemented by a future administration. As such, I feel that I
need to prepare for these possibilities, regardless of what the
current administration may promise. Of course, most other consumers
may not be aware of these projections. However, that will be of
little help to them should these projections come to pass.