CBO Warns Permanent Bush Tax Cuts Will Hurt Economy
The Republican demand to make the Bush tax cut windfall for the wealthy permanent is like Jason from the Friday the 13th slasher movies. Incredibly dangerous but once presumed dead, the GOP's perpetual payday for the rich rises again to wreak havoc and ruin lives. And delivering the warning this time is the non-partisan Congressional Budget Office (CBO).
In his testimony to the Senate Budget Committee Tuesday, CBO director Doug Elmendorf suggested the sooner we drive a stake through the heart of the budget-busting Bush giveaway to the rich, the better. In what Ezra Klein labeled "something of a bombshell," Elmendorf told the Senators extending the Bush tax cuts will "probably reduce income relative to what would otherwise occur in 2020."
As Klein explained, "The reason is simple: Debt."
Elmendorf doesn't deny that tax cuts stimulate the economy. But they don't stimulate it that much, he says, and over the long run, the net economic growth from the tax cuts will be quite small. The net deficit impact won't be. "Lower tax revenues increase budget deficits and thereby government borrowing," Elmendorf said, "which crowds out investment, while lower tax rates increase people's saving and work effort; the net effect on economic activity depends on the balance of those forces."
And in this case, size and duration matter. While President Obama wants to continue middle class tax cuts for families earning under $250,000 at a ten year price tag of $3.2 trillion, he remains opposed to the GOP demand for another $700 billion handout to the gilded class. Meanwhile, some wavering Democrats are urging a two-year extension of all of the Bush tax cuts through 2012.
But as Elmendorf argued using the chart above, all of the scenarios sacrifice long-term economic growth due to massive national debt overhang. As Klein summed it up:
As you can see, and as Elmendorf said, "Either a full or a partial extension of the tax cuts through 2012 would reduce income by much less than would a full or partial permanent extension." So the bottom line is that extending the tax cuts indefinitely would hurt the economy. The less you extend the tax cuts, the less damage you do to the economy. And this goes for both the Democrats and the Republicans, whose tax cut plans are much more similar to each other's than to a plan that doesn't extend the tax cuts, or extends them only for a couple of years.
To be sure, the damage George W. Bush and his tax cuts did to the American economy is staggering. His was the worst eight-year economic record of any modern president. Poverty is at its worst in sixteen years. As the Census confirmed yesterday, by 2007 the U.S. reached levels of income inequality not since 1929. And as tax expert David Cay Johnston recently documented, "total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels."
And then, as Elmendorf warned, there's the debt. After all, the national debt doubled during Bush's tenure. The Center on Budget and Policy Priorities demolished the mythology promoted by President Bush ("You cut taxes and the tax revenues increase") and the usual suspects on the right. CBPP found that Bush tax cuts accounted for almost half of the mushrooming deficits during his presidency. And as another recent CBPP analysis revealed, over the next 10 years, the Bush tax cuts if made permanent will contribute more to the U.S. budget deficit than the Obama stimulus, the TARP program, the wars in Afghanistan and Iraq, and revenue lost to the recession put together. Worse still, Elmendorf reiterated the CBO's previous conclusion that the Treasury-draining tax cuts, especially for the wealthy, provide comparatively little "bang for the buck."
Nevertheless, Republicans in their GOP Pledge to America promised to exhume Jason in a $4 trillion budgetary nightmare that the Economic Policy Institute estimated would trim 1.1% off the nation' gross domestic product.
Like Friday the 13th, we already know how this story ends. But that won't stop Republicans from telling it.