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The Bush Tax Cuts and the Deficit

Here's Paul Krugman, via Mark Thoma:

Paul Krugman: Chart 1 shows federal receipts as a percentage of... G.D.P... plunged starting in 2001, then made a partial – but only partial – recovery over the past year.... [E]stimates of the size of the Bush tax cuts put them at about 2 percent of G.D.P. The actual fall in revenue as a share of G.D.P. was much larger... Even now, revenue is about 3 percent of G.D.P. below its peak.... [B]y the end of the 1990’s revenues were inflated by the stock market bubble.... Back in 2001... I argued that predictions of big future surpluses, which were used to justify those [tax] cuts, were wrong – and one reason I gave was that federal revenues were inflated by the stock bubble, and would soon fall....

[T]he Congressional Budget Office show[s] that... the [recent] revenue surge came from two places, profits taxes and “nonwithheld” income taxes. Profit taxes surged partly because profits themselves surged... but also because a temporary tax break instituted in 2002 expired. We don’t know for sure why nonwithheld income taxes surged....

[E]ven now real G.D.P. is considerably lower than most people thought it would be [five years ago].... At the end of the 1990’s, people thought that the economy would grow at... more than 3 percent a year. In fact, economic growth since 2000 has averaged only about 2.5 percent.... [T]here is nothing in the data to suggest that the Bush tax cuts have had a favorable effect on the budget deficit.... Revenue is still low by historical standards, but it’s not as low as it was last year. And as a result, the budget deficit actually came down in fiscal 2005, albeit to a level that would have seemed shockingly high a few years ago.... [P]ut it this way: if a student gets a D after a string of F’s, his performance has improved – but that doesn’t put him at the top of the class.

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