Supply-side economists should be smiling these days.
After all, the Congressional Budget Office recently confirmed that President Bush’s 2003 tax-cut package has been wildly successful. Federal revenues rose $206 billion (13%) during the first nine months of this fiscal year. This follows last year’s record surge in revenues, when Uncle Sam’s coffers grew by $274 billion (15%). Not surprisingly, the White House lowered its projection of the current year’s budget deficit by more than $100 billion.
But free market economists such as my colleague Dan Mitchell were unfazed. "The supply-side tax cuts of 2003,” he told the Washington Post, “are working exactly as we would have expected. Lower taxes on work, saving and investment leads to more work, saving and investment. It’s not exactly rocket science."
The fruits of this additional work, savings and investment are evident. In the two years preceding the cuts, economic growth averaged a paltry 1 percent and too many job-seeking Americans (6 percent) were unemployed. Since then, we have experienced three years of solid 4% growth, 5.4 million new jobs have been created, and the unemployment rate hasn’t budged from its historic low of 4.6%. This growing economy may prove to be Bush’s most impressive domestic policy achievement.
But The New York Times didn’t know what to make of all this. It breathlessly described how this “unexpectedly steep rise in tax revenues from corporations and the wealthy … is surprising even seasoned budget analysts.”
The confusion can be traced back to the official revenue scorekeepers on Capitol Hill, the Congressional Budget Office and the Joint Committee on Taxation — and their failure to predict the consequences of changes in tax law.
Back in 2003, Senate moderates such as Olympia Snowe (R-Maine) and George Voinovich (R-Ohio) pressured Bush to limit the overall “cost” of the tax package to $350 billion over 10 years. Working within this artificial constraint, and bound by CBO’s and JCT’s static revenue forecasts, the final bill managed to reduce the top marginal rates on income, capitol gains and dividends, but did so within a confusing matrix of start dates, phase outs and other technicalities. Even Voinovich appeared to regret the shortcomings of his self-imposed straight-jacket, musing that he would have liked “to see larger tax relief for small businesses and working families” but only “if we can offset the additional cost.”
Sure enough, CBO informed lawmakers in May 2003 that the tax cuts would cost the treasury $94 billion in 2006. But it now appears that the cuts generated so much “unexpected” economic activity that the original CBO projection for 2006 was off by an astounding $124 billion! Add in last year’s underestimation of $89 billion, and the $25 billion oversight in 2004, and you have a cumulative CBO mistake that now totals $238 billion.
In addition to swinging and missing on the bill’s revenue effects, the Joint Committee on Taxation also struck out on its economic benefits. The legislation, it predicted, would generate only minor and short-lived gains which would be “outweighed by the reduction in national savings due to increasing federal government deficits.”
One wonders whether congressional liberals who rejected these cuts in 2003 will acknowledge their own underestimation of the power of pro-growth tax relief.
“This tax bill,” ultra-liberal Mark Dayton (D.-Minn.) fretted back then, “is one of the most dangerous, destructive and dishonorable acts of government that I have ever seen.” Kent Conrad (D.-N.D.), called it “a policy of debt, deficits and decline” that “will weaken America, not strengthen it.” Ted Kennedy (D.-Mass.) ridiculed the “ideologically rigid” economic theory underlying the cuts. “Republicans,” he sneered, “think that if you give tax breaks to the wealthiest taxpayers, they will invest more and the economy will grow. It is called ‘trickle-down’ economics.” It is destined to fail, he insisted, because “the wealthy may not use the money in ways that create jobs and expand production.”
Three years later, some tough questions are in order. Had hand-wringing moderates known then what they know now about the gusher of revenues that Bush’s cuts would usher in, would they have supported a more robust package of pro-growth reforms? Will liberals like Ted Kennedy ever concede that Reaganesque tax policies lift the economy without creating huge fiscal holes? And will lawmakers ever, ever, oust the economists at the Joint Committee on Taxation whose flawed revenue estimates limit our ability to implement the truly pro-growth tax policy we deserve?