President Bush today plans to host an event at the White House where he will boast about a 2006 budget deficit that is lower than last year. He will undoubtedly (and disingenuously) claim that his tax cuts for the extremely wealthy are helping to reduce our nation’s massive budget deficit.
According to administration calculations, the federal budget deficit in the fiscal year ending September 30, 2006, came in at about $250 billion, down from $318 billion last year. This is the second year in row that the budget deficit has declined, following the $412 billion deficit registered in fiscal year 2004.
Bush will aim to claim “success” on cutting the deficit in half by comparing the current deficit with a projection of a 2004 deficit of $520 billion, which was made at the beginning of that fiscal year. Therein lies the deceit.
Revenues over the last several years have, in fact, been dramatically lower as a share of the economy than what the Bush administration projected when it took office in 2001. To cover up that inconvenient truth, the administration has over-projected the size of anticipated budget deficits year after year, and then claimed supply-side successes when those budget deficits are less than projected.
The current deficit is only progress if Bush is allowed to choose the artificial starting point. Calculations should be based on real numbers, and that begins with federal tax revenues. Tax revenues in 2003 (well after the twin traumas of 9/11 and the economic recession of 2001) were $550 billion less than initial projections. Revenues in 2004 came in $550 billion short, and in 2005 they were light by $400 billion.
So in 2006, the disingenuous “big news” is that revenues came in only $290 billion less than the Bush team’s initial 2001 projection. In total, revenues between 2003 and 2006 fell short of the 2001 forecast by $1.8 trillion.
Any broad analysis makes clear that the stimulus effects of the tax cuts have not paid for their costs—especially as those projected costs rise to more than $300 billion a year by 2012. A 2006 Congressional Research Service analysis concluded that “no evidence of supply-side effects from the tax cuts exists thus far.” And according to one study by the Joint Tax Committee, the 2003 tax cut will ultimately decrease economic growth in the long term.
As Center for American Progress Senior Fellow Gene Sperling noted in a recent Bloomberg article, New York University professor Jason Furman points out that even the Bush administration’s own dynamic scoring estimate in their best-case scenario found that the tax cuts would raise long-run income by 0.7 percent, enough to pay for less than ten percent of the cost of making the tax cuts permanent. Sperling notes that this analysis is consistent with the fact that real per capita revenues are virtually unchanged compared with 2001, while in most recoveries of this length they grew ten percent.
Undeterred, the president today will claim that his tax cuts are responsible for the rise in tax receipts this year that helped reduce his budget deficit. Never mind that the administration is dipping into the Social Security Trust Fund to help finance the deficit.
Recently, Bush’s chief economist, Ed Lazear, argued that the administration has not said that “tax cuts pay for themselves.” Perhaps he needs to fact-check the President’s speech.
The Bush administration and Congress need to move past the happy talk about tax cuts paying for declining budget deficits. Instead, the leadership in Congress and our new Treasury Secretary, Henry Paulson, need to level with America. One place to start would be a review of the wrong priorities implicit in the president’s 2007 budget, outlined by the Center for American Progress earlier this year.
Congress might also consider comprehensive tax reform. The current tax code is unfair, unnecessarily complex, and has failed to meet our national priorities. Today, we are faced with a fundamental choice for our tax structure: continue the policies that have failed the vast majority of taxpayers and our country for the benefit of a few, or reform the tax system consistent with progressive principles.
It is time for a fairer and simpler tax system that reduces the massive deficits created over the last four years, strengthens the middle class while honoring their work, and creates opportunity for Americans of all income levels to succeed. Restoring a fair, simple, and pro-opportunity tax system, while generating the resources necessary to meet our looming challenges, requires moving our tax system in an ambitious new direction.
The Center for American Progress has proposed a comprehensive tax reform plan that rewards hard work and promotes shared prosperity. We have proposed a plan that would tax each kind of income according to the same rate schedule, whether the income is derived from wages, salaries, capital gains, or dividends. Our plan shifts the share of taxes away from the regressive payroll tax and onto a restructured income tax. And it reduces complexity by establishing a simpler, more progressive, three-rate structure and eliminating the Alternative Minimum Tax, in addition to closing corporate and individual loopholes.
Our plan enhances opportunity by reducing the deficit to strengthen the economy and promotes retirement savings for millions of Americans who currently receive no savings incentives through the tax code. Furthermore, our plan improves the Earned Income Tax Credit and expands the number of families eligible to receive the federal child tax credit. The Center for American Progress’s reform plan ultimately increases the take-home pay of low and middle income families, and generates the funds our country needs to meet its vital domestic and national security commitments.
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