Lawmakers in both parties reacted to the dramatic lowering of the U.S. credit rating by Standard and Poor’s this weekend. One reason offered for the downgrade that is certain to be raised in coming days by Democrats—notably the President and White House Press Secretary Jay Carney—is the refusal of Republicans in the House to permit the Bush tax cuts on the highest-earning Americans to expire.
“The majority of Republicans in Congress,” S&P said, in lowering the U.S.’ rating of AAA to AA+, “continue to resist any measure that would raise revenues.”
The critical reference to the efforts of congressional Republicans to maintain lower taxes on higher wage earners despite President Obama’s call for their repeal is obvious. As the Washington Post’s Zachary Goldfarb concluded, “S&P’s conclusion was as much a political critique as a financial conclusion.”
And what’s worse is that the conclusion is flawed because the assumption—namely, that the Bush tax cuts cost the U.S. needed revenue—is incorrect. In sharp contrast, since they went into effect in ’04, statistics from the Office of Management and Budget show, the Bush tax cuts actually generated considerable revenue and sometimes in record amounts.
According to the Office of Management and Budget, Historical Tables, Budget of the United States Government, Fiscal Year 2007 (Washington, D.C.: U.S. Government Printing Office, 2006, pp. 25-26, Table 1.3, January 16, 2007), with final 2006 revenue figures added in, there was an inflation-adjusted, 20% tax revenue increase between 2004 and ’06 and this represents the largest two-year revenue surge since 1965-67.
The obvious follow-up question is, of course, why did the U.S. budget suddenly go from a surplus in 1998-2001 to a $247 billion deficit in 2006. But, as economist Brian Reidl of the Heritage Foundation noted, “This argument ignores the historic spending increases that pushed federal spending up from 18.5% of GDP in 2001 to 20.2% in 2006. ( Brian M. Riedl, “Federal Spending: By the Numbers,” Heritage Foundation WebMemo No. 989, February 2006.)
In other words, the projection by the Congressional Budget Office in 2000 of a $325 billion surplus by 2006 that turned out to be $247 billion deficit was $572 billion off because neither the CBO nor just about anyone else could foresee the higher-than-expected spending that would come in the early 21st Century. Much of it was related to increased domestic spending on the part of the Bush Administration, but much was also related to fighting the war on terror that began with 9/11.
In a January 2007 study entitled “Ten Myths About the Bush Tax Cuts,” Heritage’s Reidl noted that GDP grew at an annual rate of just 1.7% in the six quarters before the 2003 tax cuts and that the growth rate was 4.1% in the six quarters following the tax cuts.
“Repealing the tax cuts would not significantly increase revenues,” he concluded. “It would, however, decrease investment, reduce work incentives, stifle entrepreneurialism, and reduce economic growth. Lawmakers should remember that America cannot tax itself to prosperity.”
That’s sound advice that the yet-to-be-named “super committee” in the House and Senate might heed as it considers recommendations to further deal with the deficit.
So might Standard and Poor’s.