Monday, August 1, 2011

Economics:  Are the Bush Tax Cuts the Root of Our Fiscal Problem?

[Federal tax] revenue has been below 15% of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.

Revenue has averaged 18% of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18% of G.D.P. in 1977 after the 1973-75 recession; 17.3% of G.D.P. in 1984 after the 1981-82 recession, and 17.5% of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2% of G.D.P. in 2003.

The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006.

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6% in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2% a year.

By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2% in 1984 and continued to rise at more than 3% a year for the balance of the 1980s.

Real G.D.P. growth was 4.1% in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4% for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7% a year — barely above the postwar average.

For much more, see Are the Bush Tax Cuts the Root of Our Fiscal Problem? by Bruce Bartlett, July 26, 2011 at Economix.

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