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.
At a ceremony on the White House lawn, Bush said his tax cuts had helped the economy grow, “which means more tax revenue for the federal Treasury.”
But 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 about $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.
To be sure, tax revenues grew by $274 billion in 2005, a 15 percent increase over the previous year, and receipts are growing this year too.
But does that mean the president’s 2001 and 2003 tax cuts generated enough additional revenue to pay for themselves? “No,” said Douglas Holtz-Eakin, chief economist for Bush’s Council of Economic Advisers in 2001 and 2002 and director of the nonpartisan Congressional Budget Office until last year.
Holtz-Eakin said other factors were behind the surge in tax revenues. One is that revenues rise as the population and the economy grow. Revenues would have risen in the post-2001 economic recovery with or without tax reductions, just as they did in the 1990s.
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 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.
Bush and Congress cut both to 15 percent in 2003; the legislation the president signed Wednesday extended that rate through 2010.
Still, Snow said, given a choice between good economic performance with high taxes or with lower taxes, “I’ll vote for … the lower taxes every time.”
