Demanding a federal budget that is fair, responsible, and meets our nation's priorities

Wednesday, August 23, 2006

Smoking Grassley

In a memo to reporters and editors , Senate Finance Committee chair Charles Grassley (R-IA) hailed last week’s CBO report, The Budget and Economic Outlook: An Update — which projected an FY2006 federal deficit of $260 billion -- thusly:

“It’s pretty obvious that the critics of tax relief will ignore this report because it refutes their point. The critics like to say tax relief guts the revenue base and causes rising deficits. But the report clearly doesn’t support that assertion. In fact, the report shows that positive revenue changes to the baseline in the FY 2006 and FY 2007 budgets far exceeded the revenue loss from the reconciled and non-reconciled tax relief approved in this Congress. Spending is the problem, not tax relief.”

Maybe this is an object lesson in August recess staff work. I wonder how much of the CBO report the memo’s author read. The report attributes the lower-than-expected $260 billion figure in large measure to a recent surge in corporate income taxes, but acknowledges that this surge is temporary:

“The recent growth in corporate tax receipts relative to GDP reflects profits’ reaching new highs relative to the size of the economy. CBO expects that over the 2007—2016 period, both profits and receipts will return to levels more consistent with their historical relationship to GDP.”

As for the implication in Grassley’s statement that tax cuts pay for themselves, it ignores a glaring truth exposed recently by the Center for Budget and Policy Priorities, which concludes: “the new CBO estimate indicates that were it not for the tax cuts of recent years, the budget would now be in balance.”

OMB Watch has been making the same points, repeatedly, over the last several weeks:

• deficit impact of capital gains and dividends cuts;
  
• the recent revenue increases are temporary and mask underlying structural imbalances; and
  
• despite short-term gains, CBO forecasts grim long-term fiscal outlook

If the Senate Finance chair seeks another authority refuting the stale notion that economic growth fully or even substantially recoups revenue loss caused by tax cuts, he need only look as far as the U.S. Treasury Department. On July 25, a Treasury-issued report stated that:

“If the revenue cost of that tax relief is offset by reducing future government spending, the increase in output is likely be [sic] about 0.7 percent under plausible assumptions.”

This means that supply-side theory, according to the Administration, is at best a kind of “seven percent solution,” that a dollar in tax cuts will yield a seven-cent return in revenues.

The non-partisan Congressional Research Service (CRS), in a July 27 memo analyzing the Treasury report, confirmed this interpretation of the report’s conclusion:

“The base case estimates suggest that the induced effect on output were the tax cuts to be extended would lead to a revenue offset of 7 percent of the initial cost."

Put another way, the Administration is saying that for every dollar in tax cuts, there is a 93 cent loss in revenue. Indeed, as the seven percent solution would predict, real revenue, adjusted for inflation, has grown only negligibly since President Bush’s tax cuts went into effect and, according to the Senate Budget Committee minority staff analysis of the CBO August Update “revenues in 2006 are still expected to come in almost $300 billion below the original projections for the year.”

Senator Grassley, look to your left or look to your right, nothing we can see “shows that positive revenue changes to the baseline in the FY 2006 and FY 2007 budgets far exceeded the revenue loss.”