A Review of the “Five Myths”

Some people just hate the Bush tax cuts.  Maybe that’s because they are named after a recent, unpopular, Republican president.  Or maybe it’s because people misunderstand the potential consequences of the upcoming sunset of these cuts.

Adding to the “fog of controversy” surrounding these cuts are stories like this one from the Washington Post.  William G. Gale writes about what he dubs “Five Myths about the Bush Tax Cuts.”  I respond.

1.    Extending the tax cuts would be a good way to stimulate the economy.

Gale says this is a myth because “top earners don’t spend as much of their income as lower earners.”  As I pointed out last week, the top 5% of earners are responsible for about 30% of consumer spending.  Also, it’s important to keep in mind that it isn’t spending that grows an economy.  We need investment in growing businesses and productive work, both of which would be discouraged by the coming tax hikes. 

2.    Allowing the high-income tax cuts to expire would hurt small businesses.

Gale argues that this “myth #2” isn’t true because most people who benefit from small business income are not in the top two tax brackets.  But the information he’s leaving out is that many of the “individuals” in the top two brackets are actually small businesses filing as individuals under our income tax code.

3.    Making the tax cuts permanent will lead to long-term growth.

Gale writes, “I have used standard growth and investment formulas to calculate that the overall effect of the Bush tax cuts on economic growth has therefore been negative — and it will continue to be negative if the cuts are extended.”  That’s odd, because other experts have predicted the opposite.  Decisions Economics, Inc. and the American Action Forum produced a report that predicted positive growth rates with an extension.  And the CBO has projected a reduction in GDP growth of about 1.4 percent in 2011 if the cuts sunset.

4.    The Bush tax cuts are the main cause of the budget deficit.

Finally, something we can agree on.  Gale points out (astutely) that, “In 2007, well after the tax cuts took effect, the budget deficit stood at 1.2 percent of GDP. By 2009, it had increased to 9.9 percent of the economy. The Bush tax cuts didn’t change between 2007 and 2009, so clearly something else is to blame.”  He says that something else is the recession.  I think that he might have also pointed to out-of-control government spending, because even though we are technically not in a recession anymore, our national deficit continues to grow.

5. Continuing the tax cuts won’t doom the long-term fiscal picture; entitlements are the real problem.

Gale claims this is a myth: “the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020… and Medicare, Medicaid and Social Security aren’t expected to hit their steepest spending increases until after 2020.”  Oh, well that’s comforting!  I won’t pretend to know what will or will not doom our long-term fiscal picture, but speaking in very simple terms: There is an imbalance between spending and revenue, and a shortfall of revenues is not the problem.  With a full economic recovery, the CBO predicts that revenues will increase to 19.6% of GDP by 2020 – that’s higher than the historic norm of 18%, but still not high enough to finance the liberal agenda that has brought spending to its current level. 

For some trusted sources of information on the Bush tax cuts, check out the Tax Foundation, the American Action Forum, or Americans for Tax Reform.  Or, you can just stay tuned here at the IWF Inkwell.