Semi-Daily Journal

Tax cuts are so inherently popular among politicians and the beneficiary interest groups that they often pass easily. However, this is only the case when discussions of tax cuts are separated from discussions of spending and revenue needs. In my mind any rule that forces Congress to truly consider the big picture budget and not address tax cuts, spending and deficits as if they were unrelated is a positive step. It makes it harder for bad fiscal policy to pass unscrutinized.

Not for an instant do I believe a "Pay As You Go" rule will limit the destructive tax cuts we are soon to have. The first tax cut was passed and turned a wonderful surplus to an awful deficit, and the second tax cut will worsen the problem. Pay As You Go will simply mean slash free school lunches and the like and pretend all will be well. Bah.

JD, what's so wonderful about a surplus?

Also, how much was the tax cut and how much did government revenues drop?

The budget for 2002 7.9% bigger than it was in 2001 (CBO).

The tax cut was stated at 1.35t over 10 years, but this number was calculated without considering interest, fixing AMT, by phasing in some taxes while phasing out other taxes etc. The economist puts the figure at at least 1.8t while others have it much higher.

The 2001 deficit was 33b (CBO).

The 2002 deficit was 317b (CBO).

So just eyeballing it, 147b looks to be new spending, some number is lost from the economic slowdown, and some number is lost from the tax cut - averaging around 180b for each of 10 years. (Unless somebody more clever than I can show me how I'm wrong.)

http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0#table1

So no, the tax cut didn't eliminate the surplus, but it clearly played a part.

Saam
Thanks for the info. I think the cut was very much back loaded, so 180b average is not the most accurate way to calculate the current impact of the cut. My point is the slowdown caused the surplus to disappear, not the tax cut.

So far no one has told me why a surplus is so wonderful.

One thing that amuses me about some liberal analysis of the budget situation is the implicit assumption that tax cuts will be irreversible or will be very difficult to reverse. I think experience shows us that tax cuts are fairly likely to be reversed. After the Reagan tax cuts in the early 80s we had a series of tax increases under both Republican and Democratic administrations with the final one coming in the 1993 budget deal.

The Bush tax cuts do not even have the virtue of being firmly engraved in law, they are all scheduled to expire. I have complete faith in our representatives to raise my taxes if they feel it is necessary.

Don't ignore the politics Joe Blog. The GHW Bush tax cut is widely considered to be a major factor in his election loss. The 1993 Democratic budget is considered a factor in the Democrats loss of control of Congress.

bakho

You mean the GHW Bush tax HIKE.

The Administration is also asking that the last tax cut be extended in length for 3 years, and that the estate tax be permanently ended. No avenue of deficit accumulation will be overlooked.

Think the coming deficits will not matter, think again, and hope you are rich.

http://www.nytimes.com/2003/04/06/magazine/06BUDGET.html

My understanding is that it goes something like this:

Growth is good.

Stability helps reduce economic waste.

The goal is: stable growth.

Surpluses suck money from the economy which would otherwise produce or pay for stuff. (Useful if the economy seems to be going 'too fast'.)

Deficits pump money into the economy and help produce or pay for stuff. (Useful is the economy is going 'too slow'.)

If the goal is stable growth then permanent surpluses can hinder the long run growth path of the economy, while permanent deficits can bolster it but will need to be paid for eventually - with interest.

I suspect that the same people that decry permanent deficits would also decry permanent surpluses. The point is not that surpluses are good or bad, but that too much of one or the other takes us away from the goal, the long term growth trajectory.

Politically, deficits are much easier to create than surpluses. Those that want the government to act responsibly tend to push for surpluses only because representatives in government need such little compulsion to create deficits.

This has little to do with other factors in the economy - regulatory activity, defense, equality, inflation/deflation, etc, but it's a pretty good basis for the surpluss/deficit debate.

An interesting NYTimes OP-Ed by former senators plus Rubin and Volcker on tax cuts. They support the return of paygo.

http://www.nytimes.com/2003/04/09/opinion/09RUBI.html

Jim

Thanks for the correction. I did mean the GHW Bush tax hike.

Why are surplusses so great?
No one is arguing that surplusses are great. The argument is that deficits are out of control. The last time the US had a true surplus (The total debt went down) was 1960 when Ike was president. As the Times Op Ed suggests, the debt could climb from 30% of GNP to 50% is that a good thing? We are running deficits of $400 Billion per year. Over 15% of the federal budget goes to service the debt. That means that we pay taxes for 2 months before any of our tax dollars go to any useful programs like education or roads. Running deficits that high is bad fiscal policy and harms the economy, especially if the deficit spending provides no short term stimulus.

Deficits are too high. There is a huge difference between deficits caused by wasteful spending and deficits caused by tax cuts.

Recheck your math. If we work 109 days to pay our taxes, http://www.taxfoundation.org/taxfreedomday.html,
we'd work less than 17 days to service the debt.

If we can hold the line on spending,(I know, wishful thinking)we can grow out of the deficit. We did it under Clinton. We'd better hurry, those damn Boomers start to retire soon.

jim, bakho was saying that 2mo. out of the 12mo. year that people usually work (16%), not the fictional idea of 109 days of taxes and the rest untaxed.

17/109=16%