The boom that wasn’t

11/03/2005

The economy has little to show for $860 billion in tax cuts

by Lee Price
Economic Policy Institute
Published October 24, 2005

Since 2001 President Bush and congressional leaders have promised that enacting each of a series of tax cuts would strengthen the economy by bringing faster growth, more jobs, and greater investment. With Congress again debating whether to extend past tax cuts and enact new ones, it’s time to review how much the last four years of tax cuts have affected the U.S. economy and budget outlook. Unfortunately for most Americans, the tax cuts since 2001 have not made today’s economy stronger. Over the last five fiscal years, the tax cuts have had a direct cost of $860 billion and (with interest costs) a total effect on the deficit of $929 billion.1 By creating excessive permanent deficits, they have lowered our future standard of living.

A pivotal debate over the last four years has concerned whether tax cuts should emphasize stimulus or long-term restructuring of the tax code. For purposes of stimulus, tax cuts should focus on moderate-income, liquidity-constrained taxpayers, and they should expire after a limited period. But the winners of the legislative process pushed for tax cuts that do not expire and that focus on those taxpayers with high income and wealth. If their tax cuts had truly strengthened the economy, we would be observing it in the data by now.

The longer it takes to restore the revenue base and reduce the deficit, the higher the price that Americans must ultimately pay. The “rebate” checks of mid-2001 did provide stimulus that reduced the depth of the 2001 recession by putting tens of billions of dollars into the hands of liquidity-constrained households just before the terrorist attacks of September 11 shook consumers’ confidence.2 But the enduring tax cuts passed that year have not enhanced the economy’s performance, and have in fact caused a permanent boost in the federal budget deficit. Foreign lenders have largely financed that deficit, and they will have to be repaid by Americans in the future.

The fact that all major economic indicators are higher today than in early 2001 does not mean that the tax cuts have been beneficial. Since the Great Depression, the resilient U.S. economy has always had gains over such four-year periods. The appropriate question to ask is: How well has the economy performed compared to similar periods in the past? If the last four years of tax cuts had worked as promised, the economy should have done better than in previous cycles, when taxes were either not cut or cut much less.

By virtually every measure, the economy has performed worse in this business cycle than was typical of past ones, including that of the early 1990s, which saw major tax increases. The single area that has excelled in the current cycle, housing, has actually done so despite reduced tax incentives since 2001. And the tax cuts certainly didn’t boost investment levels: the expiration of over $60 billion a year in business tax cuts at the end of 2004 had virtually no observable negative effect on investment.

In fact, over the last four years, nearly every indicator from job gains to economic output to spending have fallen far short when stacked against comparable periods in past cycles.

To read the full report click on the link below:
http://www.epi.org/content.cfm/bp168