NCPA - National Center for Policy Analysis


February 5, 2008

If you want to know the real cost of Washington's economic stimulus, look no further than yesterday's Fiscal 2009 White House budget.  The federal deficit is taking a giant leap backward, thanks in substantial part to the $150 billion in "temporary" tax cuts, says the Wall Street Journal.

This non-stimulating stimulus will largely take the form of tax rebates and credits that will do little to change economic incentives.  Thus they will result in a nearly dollar-for-dollar revenue loss to the Treasury, expanding a deficit that was already going to climb to $219 billion thanks to slower economic growth and faster spending, says the Journal.

Yet President Bush's 2003 reductions on capital gains, dividend and marginal income-tax rates are precisely the kind of tax cuts that lift incentives to work and invest and thus recoup at least some of the revenue lost due to lower rates:

  • Revenues climbed by some $785 billion over four years in the wake of those tax cuts.
  • A 2006 study by the Bush Treasury also analyzed the revenue impact of different tax cuts, and found precisely this difference between marginal and non-marginal tax cuts. But apparently the Bush White House forgot.

The unsung budget story is that overall revenue growth remains relatively healthy:

  • The White House budget office says fiscal 2007 revenue rose by 6 percent, and the main reason they're estimated to fall modestly this year is the "stimulus" tax rebates.
  • Taxes as a percentage of gross domestic product (GDP) are now 18.5 percent, slightly higher than the 40-year modern historical average.

Source: Editorial, "The 'Stimulus' Deficit," Wall Street Journal, February 5, 2008.

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