September 27, 2005

Tax Cuts Work: Government Forecasting Incorrectly Thought Tax Costs Would Reduce Tax Revenue

From an WSJ article by Newt Gingrich and Peter Ferrara (subscription required):

In February, for example, OMB projected a federal budget deficit of $427 billion for the current 2005 fiscal year (ending in October). A few months later, in July, OMB projected the deficit at $333 billion. The February projection was off by almost $100 billion, or 28%. This episode is not unique. In February 2004, OMB's projected deficit (for fiscal year 2004) was off by $109 billion.

CBO is no different. In March, CBO projected a deficit of $394 billion for the current fiscal year. Last month, its projected deficit was $331 billion. CBO's numbers changed by $63 billion in five months. The changes in these federal deficit projections resulted because OMB and CBO had projected massive losses from the 2003 Bush tax cuts. Those losses never happened. Thus, in February 2003, OMB projected federal revenues of $2.135 trillion for fiscal year 2005. That was before the Bush tax cuts. Now OMB projects that, with the tax cuts, federal revenues for 2005 will be $2.140 trillion -- slightly more than the revenues it projected before the tax cut.

OMB and CBO are not the only players in the scoring game. The Congressional Joint Committee on Taxation (JCT) and the Treasury Department also estimate the revenue impacts of tax policy changes. Their projections have similar problems. Consider the 1997 tax changes, which primarily involved a cut of 28.6% in the capital gains tax rate. According to a recent report from the American Shareholders Association by Dan Clifton, JCT estimated that revenues would increase $7.8 billion from 1997 to 1999, but decline $28.8 billion over the next seven years. Instead, the actual increase in federal revenues from capital gains taxes from 1997 to 1999 was more than 10 times higher -- $84 billion. What about the projected losses later on? Capital gains revenues have now grown to double their levels of 1996, just before the tax cut.

Gingrich and Ferrara find a consistent bias in the projections:

The errors were not random. They were strongly and consistently biased against pro-market, pro-growth reforms, and they are the long-recognized results of outdated methodologies employed by federal scoring agencies. The end result is that such errors greatly hamper or prevent Congress from adopting policies that would maximize economic growth and personal prosperity.

Tax cuts have powered the economy.

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Categories: The Economy

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