Ten years ago today, the first round of Bush tax cuts became law. But what if they hadn’t? What would our fiscal situation look like if history had been different in just one respect: if we’d never implemented President George W. Bush’s eponymous tax policies? The short answer is that the debate over federal debt levels would be entirely different. In that alternate world, total debt as a share of GDP would be under 50 percent this year—instead of pushing 70 percent—and it would be expected to stay under 60 percent for the rest of the decade. (see chart) That’s well below the levels causing such great consternation in Washington.
Bear in mind that President Bush inherited perhaps the strongest federal balance sheet in postwar history. There were record-high surpluses, debt was at around 30 percent of GDP and falling, and the Congressional Budget Office projected that the federal government would be debt free by 2009. The country was in great fiscal shape to deal with any crises or emergencies coming down the road, and it was even ready to deal with the coming retirement of the baby boom generation.
But rather than follow President Bill Clinton’s successful lead, President Bush handed out gigantic tax cuts, with people at the top of the income ladder getting the biggest breaks. Those “supply-side” tax cuts were a complete failure as economic policy, and now, instead of being debt free and well prepared to care for an aging population, our debt-to-GDP ratio is almost 70 percent. If those tax cuts are extended—instead of being allowed to expire on schedule at the end of 2012—it will approach 100 percent by 2021.
Of course, other factors contributed to the federal budget’s deterioration: the terrorist attacks of September 11, 2001; the subsequent recession; the wars in Iraq and Afghanistan; President Bush’s domestic spending programs; and the onset of the Great Recession at the end of 2007, which led to massively reduced tax collections as incomes plummeted.
But even with all of that, when one adds back the foregone revenue from the Bush tax cuts to the actual revenue collections over the past 10 years, the debt picture suddenly becomes markedly better. That additional revenue would have meant lower deficits in each year and therefore lower overall debt. And lower debt means lower interest payments on that debt, further reducing deficits. In the “no Bush tax cuts” alternate universe, our debt-to-GDP ratio would be less than 50 percent this year even after all the other fiscal shocks of the past 10 years.
Similarly, in a future without the Bush tax cuts, the national debt would be under control. In the Congressional Budget Office’s official baseline, the debt-to-GDP ratio rises by only 3 percentage points from 2012 to 2021 despite the retirement of the baby boomers. In large part, that’s because the CBO baseline assumes the full expiration of the tax cuts. And if instead of starting from almost 75 percent of GDP, we were starting from just 55 percent—which is where we’d be in 2012 if the Bush tax cuts had never happened—debt would stay below 60 percent for the remainder of the decade. There is no magic level above which the debt level becomes dangerous. But few, if any, consider 60 percent of GDP in debt as a significant risk to the country.
To some extent, there’s nothing we can do about the disastrous fiscal impact of the Bush tax cuts now. We’re stuck with the debt built up during the past 10 years, and we’re stuck with the interest payments on that debt. But we can make choices about where we go from here.
We know that the next few decades are going to be difficult ones for the federal budget. As the population ages, it will cost more to ensure a safe and secure retirement for America’s senior citizens.
So can we afford to continue a tax regime that’s already weakened our ability to meet those needs? If all the Bush tax cuts are extended, debt will rise from about 70 percent of GDP this year to just less than 100 percent of GDP by 2021. Debt will reach 93 percent of GDP by 2021 if the bonus tax cuts on income of more than $250,000 are allowed to expire but the rest remain. If we allow all the Bush tax cuts to expire after 2012 as scheduled, debt will be around 80 percent by 2021.*
There’s no undoing the fiscal damage from the Bush tax cuts. But we can learn from the mistakes of the past and try not to repeat them. Ten years after the first round of Bush tax cuts were signed into law, we know with certainty that they were a huge mistake. Without them, the country would have been in much stronger shape to weather all the fiscal storms of the past 10 years and much better prepared for those of the next 10.
*All three scenarios assume that the alternative minimum tax is indexed to inflation.
Michael Linden is Director of Tax and Budget Policy and Michael Ettlinger is Vice President for Economic Policy at American Progress.