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NATIONAL CENTER FOR POLICY ANALYSIS
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Don't Blame The Tax Cut
Daily Policy Digest

Tax Issues / Budget Deficits

Monday, August 26, 2002
Tomorrow, (August 27), the Congressional Budget Office (CBO) will release its mid-session budget review. The CBO will probably show greater spending and lower revenues than estimated by the White House Office of Management and Budget a few weeks ago. This will certainly lead to further calls by Democrats to rescind last year's tax cut. But there is actually a substantial amount of new economic data available since the OMB report that would also change its analysis substantially if redone today.

  • A July 29 Commerce Department report shows sharply lower growth and lower corporate profits.
  • There is little doubt that the falloff in revenues is the principal cause of the budget's deterioration -- though Democrats will try to pin this fact entirely on the 2001 tax cut.
  • The CBO compares current revenues to projections made in January 2001, before any tax cuts were enacted; between then and now, revenues are $376 billion lower than expected.
  • But $302 billion of this, or 80 percent, results from technical and economic factors that would have occurred even if the tax cut had never been passed.
Undoing the tax cut would cause individual taxes to be more than $78 billion higher this year than under current law, $80 billion next year and $95 billion the following year (see figure). When considering last year's Joint Committee on Taxation figures on the 2001 tax cut for this year -- and assuming Democrats would take it away if they could -- the effect would be to raise taxes for those making less than $50,000 per year by $24 billion. Those with incomes under $100,000 would bear 60 percent of the total tax increase.

Tax cuts didn't cause the surplus to disappear and tax increases won't bring it back.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 26, 2002.

For more on Budget Deficits
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