Recent tax cuts increased the 2009 deficit

October 27, 2009

Recent tax cuts increased the 2009 deficit

Bruce Bartlett was a domestic policy adviser to President Ronald Reagan, and conservative supply sider. He did a little simple math and uncovered that the cause of the deficit increase is revenue-related.

The increase cannot be blamed on spending – the Obama administration’s spending has been more conservative than was forecast – $28 billion less than was predicted.  This math strongly suggests that more tax cuts, as some in the GOP are advocating, would actually further increase the deficit; tax cuts were unambiguously a major factor in the problematic revenue decline that underlies the deficit growth.

Mr. Bartlett, in a column dated October 24th, was responding to the theory that tax cuts were the best way to solve the deficit, as was advanced by Mort Zuckerman recently in a New York Daily News opinion piece.

Here’s an excerpt:

According to the Congressional Budget Office’s January 2009 estimate for fiscal year 2009, outlays were projected to be $3,543 billion and revenues were projected to be $2,357 billion, leaving a deficit of $1,186 billion. Keep in mind that these estimates were made before Obama took office, based on existing law and policy, and did not take into account any actions that Obama might implement.

Therefore, unless one thinks that McCain would have somehow or other raised taxes and cut spending (with a Democratic Congress), rather than enacting a stimulus of his own, then a deficit of $1.2 trillion was baked in the cake the day Obama took office. Any suggestion that McCain would have brought in a lower deficit is simply fanciful.

Now let’s fast forward to the end of fiscal year 2009, which ended on September 30. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.

To recap, the deficit came in $223 billion higher than projected, but spending was $28 billion [less] and revenues were $251 billion less than expected. Thus we can conclude that more than 100 percent of the increase in the deficit since January is accounted for by lower revenues. Not one penny is due to higher spending.

It turns out you have to go back to 1950 to find a year when federal revenues were lower as a share of GDP. So Bartlett, who is happy to say there is some basis for criticism of the Obama administration’s anti-recession tactics, points out that excessive spending isn’t the problem.

In fact, with much of the revenue that was not collected due to the tax cuts sitting more-or-less idle in savings accounts, and certainly not trickling down to stimulate job growth, or bank lending, etc., Bruce Bartlett concludes that:

The idea that Reagan-style tax cuts would have done anything is just nuts.

Bartlett’s article is a must-read for anybody involved in the U.S. economy – which should include every voter and pundit, not just those elected to Congress.

Permalink