Lower Deficit Sparks Debate Over Tax Cuts' Role

By Lori Montgomery
Washington Post Staff Writer
Tuesday, October 17, 2006

With great fanfare, President Bush last week claimed credit for a striking reversal of fortune: New figures show the federal budget deficit shrinking by 40 percent over the past two years, a turnaround the president hopes will strengthen his push for further tax cuts.

Bush hailed the dwindling deficit as a direct result of "pro-growth economic policies," particularly huge tax cuts enacted during his first term. "Tax relief fuels economic growth. And growth -- when the economy grows, more tax revenues come to Washington. And that's what's happened," Bush said.

Economists said Bush was claiming credit where little is due. The economy has grown and tax receipts have risen at historic rates over the past two years, but the Bush tax cuts played a small role in that process, they said, and cost the Treasury more in lost taxes than it gained from the resulting economic stimulus.

"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute. "It's logically possible" that a tax cut could spur sufficient economic growth to pay for itself, Viard said. "But there's no evidence that these tax cuts would come anywhere close to that."

Economists at the nonpartisan Congressional Budget Office and in the Treasury Department have reached the same conclusion. An analysis of Treasury data prepared last month by the Congressional Research Service estimates that economic growth fueled by the cuts is likely to generate revenue worth about 7 percent of the total cost of the cuts, a broad package of rate reductions and tax credits that has returned an estimated $1.1 trillion to taxpayers since 2001.

Robert Carroll, deputy assistant Treasury secretary for tax analysis, said neither the president nor anyone else in the administration is claiming that tax cuts alone produced the unexpected surge in revenue. "As a matter of principle, we do not think tax cuts pay for themselves," Carroll said.

But, he said, "we do think good tax policy can lead to important economic benefits. . . . The size of the tax base is larger than it would have been without the tax relief."

The subtleties of that argument have been lost on the campaign trail. With less than three weeks to go until the Nov. 7 election, Republicans are promoting the good fiscal news, eager to talk about something other than the House page scandal and mounting casualties in Iraq.

House Speaker J. Dennis Hastert (R-Ill.) claimed credit for "driving down the deficit" and accused Democrats of plotting to roll back the tax cuts if they win a majority in the House, a move Hastert said "would destroy jobs and hurt the economy." Bush, meanwhile, called on Congress to permanently extend the cuts, which are scheduled to expire by 2010, at an additional cost to the Treasury of $2.2 trillion by 2016, according to CBO estimates.

Democrats criticized the president for celebrating a deficit that still ranks among "the largest in our nation's history," as House Minority Leader Nancy Pelosi of California put it. And they pointed to CBO projections that the deficit will rise again next year and balloon in coming decades as 78 million retiring baby boomers make claims on Social Security and Medicare.

"The truth is that the administration's fiscal policies have failed," said Sen. Kent Conrad (N.D.), the senior Democrat on the Senate Budget Committee. "They have not benefited most Americans. They have dramatically worsened our long-term budget outlook. And they are putting our fundamental economic security at risk."

Without question, the deficit is receding. Despite spending swollen by storm cleanup on the Gulf Coast and the war in Iraq, the deficit fell to $248 billion in the fiscal year that ended Sept. 30, down from a record $413 billion in 2004, as higher tax receipts poured into the government's coffers.

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