Mr. Giuliani and the Tax Fairy

Saturday, December 1, 2007

"I KNOW THAT reducing taxes produces more revenues," Republican presidential candidate Rudolph Giuliani declares in a new television ad launched Thursday. "Democrats don't know that. They don't believe it."

There's a good reason for that: It's not true. Produces more revenue than what? Than if taxes had not been cut? No -- and no matter how many times Republican politicians caught up in the thrill of supply-side thinking pronounce that tax cuts pay for themselves, they cannot will it to be correct.

You don't have to turn to Democrats to refute this point; just read the studies and comments by Republican economists, including many from the Bush administration. President Bush's Treasury Department, analyzing the "dynamic" effects of making the Bush tax cuts permanent, found that even under favorable assumptions, the positive economic impact would make up for no more than 10 percent of the tax cuts' cost.

"I certainly would not claim that tax cuts pay for themselves," Edward P. Lazear, chairman of the president's Council of Economic Advisers, testified last year. He's not alone. In the 2003 Economic Report of the President, the council concluded that "although the economy grows in response to tax reductions (because of the higher consumption in the short run and improved incentives in the long run) it is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity."

How unlikely? N. Gregory Mankiw, another former Council of Economic Advisers head in the Bush White House, concluded in 2005 that cuts on capital gains taxes could generate enough extra growth to recoup half the lost revenue in the long run; cutting taxes on wages could recover just 17 percent of the costs. An analysis conducted by the Congressional Budget Office under the direction of Douglas Holtz-Eakin, who had been an economic adviser in the Bush White House, found that, under the rosiest of scenarios, a 10 percent reduction in the personal income tax rate would generate enough economic growth to replace 22 percent of lost revenue in the first five years and 32 percent in the second five.

Mr. Giuliani isn't the only believer in the tax fairy; numerous Republicans, including the president, have made similarly fanciful claims. But if he were to find himself in the White House and hoping to find that extra revenue he is convinced tax cuts produce, Mr. Giuliani would discover only disappointment under the presidential pillow.

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