The fact is that it is only in very exceptional circumstances that there would even be the possibility of a tax cut that would so stimulate growth that it would pay for itself. Even the Bush Administration admits this. The 2003 Economic Report of the President says, "Although the economy grows in response to tax reductions … it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."
Recent academic research suggests that feedback effects would offset only a fraction of the static revenue loss, that which would result from no effect on consumption or incentives. A 2004 study by Harvard economists N. Gregory Mankiw and Matthew Weinzierl found that a cut in taxes on capital might recoup 17 percent of the static revenue loss in the first three years and a cut in taxes on labor could recoup 13 percent. Mankiw served as chairman of the Council of Economic Advisers under President Bush. A study by the Congressional Budget Office in December 2005 found that a tax-rate cut would recoup at most 20 percent of the static revenue loss in the first five years.
Overall, federal revenues are just barely back to where they were five years ago in nominal terms. According to the CBO, federal receipts were $2,025.5 billion in 2000 and $2,153.0 billion in 2005. Revenues fell 1.7 percent in 2001, fell another 6.9 percent in 2002 and fell again by 3.8 percent in 2003. They didn't start to bounce back until 2004, when they rose by 5.5 percent.
Revenues as a share of the gross domestic product fell every year from 2000 to 2004, from 20.9 percent to 16.3 percent. The 2005 increase only raised revenues to 17.5 percent -- still well below their historical average of 18.1 percent of GDP. It seems to me that the normal cyclical expansion after the end of the recession in 2001 has done far more to raise revenue than any Laffer curve effect. Revenues are simply returning to trend, nothing more.
In short, there is very little likelihood that revenues are rising because the 2003 tax cuts or would fall if they are not extended. The case for extending them must be made on other grounds.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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