Commentary Magazine

Tax Cuts


To the Editor:

Bruce Bartlett’s defense of the Bush tax cuts is considerably more subtle and compelling than the spin coming out of the Bush White House, which Mr. Bartlett, to his credit, concedes to be incoherent [“Explaining the Bush Tax Cuts,” June]. But this is like saying that Patrick Buchanan’s analysis of Middle Eastern politics is more subtle than that of Saddam Hussein’s former information minister. With so low a baseline for comparison, even a dramatic improvement leaves us far below the desired level.

Mr. Bartlett commits a number of medium-sized analytical errors and one giant conceptual error. The Bush tax-cut proposals coincided with the appearance in the late 1990’s of huge projected budget surpluses. “Conservatives were wary of these predictions,” Mr. Bartlett writes, “fearing that surpluses would lead to massive new government spending.” But it was Democrats and moderate liberals who suspected that the projected surpluses were too good to be true. Conservatives not only defended the projected surpluses as accurate, they insisted that the projections were too small. When questioned in 2001 about the possibility that surpluses might prove chimerical, White House budget director Mitch Daniels said, “Well, we really can’t miss here. . . . We’ve been underestimating revenue by as much as $80 billion a year. And we are likely to continue doing that.”

In his major economic speech of 2001, Bush himself cleverly spoke of his uses of the surplus in the past tense: “We have increased our budget at a responsible 4 percent, we have funded our priorities, we have paid down all the available debt, we have prepared for contingencies, and we still have money left over”—as if the money had already flowed into the Treasury. In the Democratic response, House minority leader Richard Gephardt warned that Bush was not realistically accounting for his own spending plans, and was leaving no room for the possibility of an economic downturn or military emergency. Those fears were vindicated in spades.

Mr. Bartlett likewise defends the distribution of the Bush tax cuts, citing the fact that the richest 20 percent of Americans now pay only a slightly smaller share of federal income and payroll taxes. This statistic, while less misleading than, say, Bush’s ludicrous insistence that “by far the vast majority of my tax cuts go to the bottom end of the spectrum,” is still misleading. Not only does it omit Bush’s repeal of the estate tax, which is paid entirely by the very wealthy, but it obscures the fact that the greatest benefits of the tax cuts fall to the richest 1 percent, whose share of the federal tax burden will decrease by about a tenth by 2010.

Mr. Bartlett does not entirely deny the distributional effects of the Bush tax cuts. Rather, he argues, “With the tax burden skewed so heavily toward the rich, it is simply impossible to reduce that burden in a way that is not similarly skewed toward the rich.” Impossible? In 2001, left-wing Democrats proposed giving everybody who pays taxes a $350 refund. If that seems too Marxist, we could simply reduce the rate paid by the bottom tax bracket or reduce the rates for all the tax brackets. Mr. Bartlett’s claim that it is impossible to cut taxes without having distributional results similar to those brought about by Bush is simply false.

Mr. Bartlett’s biggest failure is his attempt to explain away deficits. Republicans generally make two main defenses against the charge of deficit-mongering. The first is that tax cuts, by reducing revenues, will “starve the beast,” forcing commensurate reductions in spending. As Mr. Bartlett concedes, this argument is nonsense. Spending slowed after George H.W. Bush and Bill Clinton raised taxes in an attempt to restore fiscal discipline; only after George W. Bush convinced Congress to throw away its inhibitions did spending rise again.

The second GOP defense, which contradicts the first, is that tax cuts will permanently raise economic growth to so great an extent that revenues will actually rise. Somehow, there are supply-siders who still believe this, even after they predicted in unison that Clinton’s 1993 tax hike would cripple the economy and cause revenues to drop. But Mr. Bartlett does not argue for magical revenue growth, either.

Mr. Bartlett’s only defense on this point is to pooh-pooh the effect that deficits have in driving up interest rates. The relationship between deficits and interest rates is an economic truism, as even Greg Mankiw, the Harvard economist appointed by Bush to head the Council on Economic Advisors, has conceded. “Interest rates are determined by so many different factors,” Mr. Bartlett argues, “that it is absurd to think that the deficit is the overriding influence.” But nobody claims that deficits are the “overriding” factor, just that they are a factor.

Even if this were not true, Mr. Bartlett ignores altogether the even more important fiscal logic. Bush has reduced taxes far below what is sufficient to pay for what even a government under unified conservative Republican control wants to spend. In 2004, federal spending accounted for 20 percent of the gross domestic product (GDP), which is not unusually high. Federal revenues, by contrast, accounted for 15.8 percent of GDP, which is the lowest percentage since 1950. Economic growth should bring that figure up, but without corrective action, it will not come anywhere close to matching outlays. Bush has left us with a tax system that, into perpetuity, will raise several hundred billion dollars less than the government will spend.

Spending must be paid for somehow. If we do not pay for it through taxes, our children will pay for it with interest. It is perfectly clear why the administration would desire such an outcome: why not foist the bill for their spending onto taxpayers who will be voting long after Bush has left office? What is not clear, and what Mr. Bartlett does not even attempt to explain, is why anybody who has the national interest in mind would agree.

Jonathan Chait

The New Republic

Washington, D.C.


To the Editor:

Bruce Bartlett’s paean to the Bush tax cuts argues that they will have little effect on long-term deficits and will promote long-term growth; that their benefits have been distributed equitably; and that they represent tax reform. We disagree on all three counts.

If the tax cuts are made permanent (and not gradually erased by the effects of the Alternative Minimum Tax), they will add $3.7 trillion in deficits over the next ten years. More importantly, they will worsen the already grim long-term budget picture. The Urban Institute-Brookings Institution Tax Policy Center has found that over the next 75 years—the period customarily used to assess Social Security’s finances—the cost of the tax cuts will be three to five times the entire Social Security shortfall. The tax cuts just for the top 1 percent of households will be as large as the entire Social Security shortfall.

Mr. Bartlett’s assertion that the tax cuts will promote long-term growth does not stand up, either. Several of the tax cuts, such as the reductions in marginal rates, might modestly promote growth if they were paid for. But they are not, and consequently will swell the deficit. Studies conducted by the Brookings Institution, the Federal Reserve, the Congressional Budget Office, and Congress’s Joint Committee on Taxation have found that the growth-reducing effects of the enlarged deficits will cancel out most or all of the tax cuts’ growth-promoting effects.

Mr. Bartlett’s defense of the fairness of the tax cuts is also misleading. When describing the effect of the tax cuts on the share of taxes that high-income individuals pay, he leaves out the effects of repealing the estate tax, which benefits only the very affluent. In addition, he ignores the best measure of a tax cut’s effects on different income groups: its impact on after-tax income. The Bush cuts make the distribution of after-tax income more unequal by giving the vast bulk of their benefits to wealthy households.

Moreover, since the tax cuts cannot be deficit financed forever, they ultimately will have to be paid for through some combination of budget cuts and tax increases. Under almost any approach likely to be adopted, the bottom 80 percent of the population will end up as net losers. They will lose more from the measures adopted to pay for the tax cuts than they gain from the tax cuts themselves. Only the top 20 percent will come out ahead.

Finally, Mr. Bartlett’s claim that the tax cuts represent tax reform—helping to move the nation from an income tax to a consumption tax—rings hollow. The goal of a consumption tax is to raise national saving, which is the sum of private saving and public saving. Though the Bush tax cuts may modestly increase private saving, they will substantially reduce public saving by swelling the deficit, and the net effect on national saving will be negative.

What the tax cuts really represent is a shift from a tax on most forms of income, including the investment income of the affluent, toward a tax under which all wages are taxed but much investment income is sheltered. This is a shift we do not regard as “reform.”

Robert Greenstein

Center on Budget and Policy Priorities

Washington, D.C.


Peter R. Orszag

The Brookings Institution

Washington, D.C.


Bruce Bartlett writes:

Jonathan Chait says that “Democrats and moderate liberals . . . suspected that the projected surpluses were too good to be true,” while conservatives “insisted that the projections were too small.” When evaluating this claim, it is important to keep the timing straight. Before George W. Bush took office, the Clinton administration and most liberals were more than happy to project massive surpluses as far as the eye could see. It was only after Bush took office that liberals and Democrats suddenly decided that Clinton’s projections were suspect.

In the last Clinton budget, issued on January 16, 2001, there is no suggestion of an economic slowdown ahead. The White House predicted real annual growth of 3.2 percent in the gross domestic product over the next ten years, and projected massive and growing budget surpluses. The surplus was expected to rise from $236 billion in fiscal year 2000 to $256 billion in 2001, to $277 billion in 2002, and to continue rising every year of the forecast period, reaching $810 billion in 2011. The entire national debt was projected to be paid off by 2009.

It is also worth remembering that the Clinton administration had made substantial errors in budget estimates over the previous five years, projecting revenues well below what the Treasury actually received. Between 1996 and 2000, revenues came in $850 billion higher than estimated.

The point I made in my article is that by the time then-candidate Bush put forward his tax plan in December 1999, it was perfectly reasonable to think that large budget surpluses had become the norm. Even by the time he took office, it was still a realistic assumption. To its credit, the Bush administration quickly marked down projected real GDP growth for 2001 to 2.4 percent—exactly the same as the Congressional Budget Office’s estimate. The administration’s long-term forecast was slightly more pessimistic than the “blue chip” consensus of private forecasters.

As it turned out, everyone was wrong. Real GDP ended up dropping by 0.5 percent in 2001. The number of professional forecasters who even got close to predicting this economic reversal can be counted on the fingers of one hand with a couple left over.

It was the recession, more than the 2001 tax cut, that caused federal revenues to collapse and the surplus to evaporate. Jonathan Chait is trying to pretend, with the benefit of 20-20 hindsight, that his side had a better handle on what was to come than in fact was the case. Even if Al Gore had become President and Congress had gone Democratic, some sort of anti-recessionary fiscal program would have been enacted. Under Democrats, it probably would have taken the form of increased government spending, rather than tax cuts, but it likely would have been of the same order of magnitude.

In other words, the choice was never between a continuation of surpluses under Democratic stewardship and Republican deficits caused by tax cuts. It was really between Republican deficits and Democratic deficits, both caused principally by the recession, with the former abetted by tax cuts and the latter by jobs programs.

What really bothers Mr. Chait is not the deficits on Bush’s watch but rather the distributional consequences of his tax cuts. This is evident in his singling out for special scorn the phasing out of the estate tax. This tax is and always has been a trivial contributor to federal revenue—on the order of 1 percent. It exists not to fund government programs but solely to satisfy the envy of those who, rather than allowing someone to become rich, would prefer that no one become rich.

Mr. Chait’s obsession with the distributional consequences of tax policy, rather than with its impact on revenues, is confirmed by his disagreement with my contention that one cannot cut taxes without benefiting the rich. I was simply noting that whether one looks only at the income tax or also at the payroll tax, the vast bulk of all federal taxes are paid by those generally considered to be rich.

I overstated the point somewhat by saying it is “impossible” to cut taxes without benefiting the rich. Today, unfortunately, it is possible to have “negative” tax cuts, like the Earned Income Tax Credit, that send “refunds” to people who have no tax liability. But this is just government spending disguised as a tax cut. To the average person, benefiting from a “tax cut” implies that one actually pays taxes. And any kind of across-the-board tax cut will benefit people in proportion to the amount of taxes they pay. This will necessarily benefit the wealthy. That was my point.

Finally, Mr. Chait raises the bugaboo of deficits. Of course, deficits are a function of both lower revenue and/or higher spending. Since I dealt only with Bush’s tax policy, I did not address the spending side. Clearly, the recession and terrorist attacks of 9/11 changed this situation drastically and would have done so even if Al Gore had been President on that day. But Mr. Chait has a point when he says that Bush and the Republican Congress have raised spending well in excess of what could reasonably be justified. He is right that deficits no longer seem to restrain spending as they did in the 1980’s, though it was, until recently, a reasonable assumption to make.

Mr. Chait’s concern for the effect of deficits on interest rates is simply baseless. Nowhere do I say that deficits have no effect; only that their impact tends to be grossly overblown. The most recent research, published by Glenn Hubbard of Columbia University and Eric Engen of the American Enterprise Institute in the National Bureau of Economic Research’s prestigious Macroeconomics Annual, estimates that an increase in the public debt of 1 percent of GDP ($110 billion) would raise the long-term interest rate by 3 basis points (0.03 percent). This sounds about right to me.

Mr. Chait is right that we now have a fundamental structural imbalance between revenues and outlays that must be addressed. But the problem is as much on the spending side as on the tax side. Spending is not his concern, however. Mr. Chait’s desire is to spend even more as long as it is paid for by higher taxes on the rich. That is really the substance of his letter.

Robert Greenstein and Peter R. Orszag share many of Mr. Chait’s concerns, but they carry them to an absurd extreme. They project Bush’s tax cuts out for 75 years as if they are set in concrete and no future Congress or President can alter them in any way. Then they compare the tax cuts to Social Security in a way that implies a linkage between the two where none exists. The only purpose of such an analysis is to score cheap political points by making seniors worry unnecessarily about their future benefits.

In the end, Messrs. Chait, Greenstein, and Orszag are not arguing with what I wrote but rather with what President Bush did. While I am generally sympathetic to his tax cuts, I am not by any means an enthusiastic supporter of every aspect of them. If it were up to me, I would have done things a lot differently—perhaps in ways more agreeable to my critics.

My main purpose in the article was to explain the logic of the Bush tax cuts in a way that Bush himself has never done. I think the President would have helped himself if he had laid out a vision for tax policy so that people could see how the pieces fit together. Absent such a vision, it is much easier for his opponents to assume the worst—that he is only interested in starving the government, slashing aid to the poor, rewarding the Republican party’s rich contributors, etc.

I cannot be sure that my analysis of the Bush tax cuts is correct, but I am certain that my critics are wrong in theirs.

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