Thought Theater

Bush Tax Cuts: Pay Now Or Pay Later genre: Polispeak & Six Degrees of Speculation

President Bush and many Republicans have hailed the bill extending the reduction in capital gains and dividends as an important measure to keep the economy growing. Missing from the analysis is the impact that such tax reductions actually have on the tax revenues generated for the treasury. A number of economists indicate that the extension of these tax reductions will lose more revenue than they will generate. Knight Ridder has the full article here.

WASHINGTON - When President Bush signed legislation Wednesday to extend lower tax rates for capital gains and dividend income through 2010, he suggested that his tax cuts are behind a surge of new revenue into the Treasury, and implied that it's enough to offset the revenue lost by these reductions.

That's just not true. A host of studies, some of them written by economists who served in the Bush administration, have concluded that tax reductions mean less money for the Treasury.

The cuts Bush extended Wednesday will cost the Treasury an estimated $70 billion over five years. They may help spur economic growth, but they still lose more revenue than they generate. And unless they're matched by lower federal spending, they worsen federal budget deficits.

Treasury Secretary John Snow conceded Tuesday that the much-touted tax cuts for capital gains and dividend income don't drive today's strong economy.

Asked by Knight Ridder if the tax reductions paid for themselves, Snow acknowledged that they don't. He also acknowledged that economic growth and stock market gains were strong in the late 1990s, when the capital-gains tax stood at 20 percent and dividend income was taxed at rates as high as 38.6 percent.

The federal budget held a $236 billion surplus in fiscal 2000. After Bush's 2001 and 2003 tax reductions, it went into annual deficits, peaking at $412 billion in fiscal 2004. This year's is projected to be about $300 billion.

At a time when budget deficits have spiraled to new highs and we will likely spend well over a half trillion dollars on the war in Iraq, reducing taxes for a very small, already wealthy, segment of the population seems unconscionable. The longstanding Republican mantra of reducing taxes has played well with many voters despite the limited benefit to most of those voters. The failure to acknowledge the impact on budget deficits and the related increase in the national debt will eventually require attention and may be far more painful than imagined.