Revised March 22, 2004



“Tax cuts don’t need to be paid for [with offsets] — they pay for themselves.”

House Budget Committee Chairman Jim Nussle

Quoted in BNA Daily Tax Report, March 17, 2004


By Richard Kogan, David Kamin, and Joel Friedman


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Do tax cuts pay for themselves?  This past week, the House Budget Committee approved legislation that would require all expansions of entitlement programs to be paid for with offsetting cuts in spending.  When asked by a reporter why a similar “pay-as-you-go” requirement was not applied to tax cuts, Chairman Nussle responded that “Tax cuts don’t need to be paid for [with offsets] — they pay for themselves.”[1]

At the heart of Chairman Nussle’s response is the belief that tax cuts generate so much economic growth that they pay for themselves — that is, that the economy expands so much as a result of tax cuts that it produces the same level of revenue as the economy would produce without the tax cuts.   This belief is one of the most powerful and enduring myths in public finance.  No reputable economist — liberal or conservative — has ever shown that tax cuts pay for themselves.  The assertion that tax cuts pay for themselves is little more than wishful thinking, and is rejected by virtually every serious economist and budget analyst.

Do Tax Cuts Pay For Themselves?  Economists Say No.

Table 1:
Comparing the 1980s and 1990s

  Avg. real economic growth Avg. real income-tax growth
1981-90 3.3% 1.5%
1990-01 3.2% 4.2%
Notes: To avoid distortions, economic growth is measured from one business-cycle peak to the next.  Tax figures include individual and corporate income taxes.  If receipts from capital gains were not included, the annual growth of income taxes would have averaged 1.1 percent in the 1980s and 3.9 percent in the 1990s.  Sources: Bureau of Economic Analysis, OMB Historical Tables.

Do Tax Cuts Pay For Themselves?  History Says No.

In 1981, Congress approved very large supply-side tax cuts, featuring much lower marginal income-tax rates.  In 1990 and 1993, by contrast, Congress raised marginal income-tax rates on the well off.  We can thus compare two decades with contrasting tax regimes.  Such a comparison shows:

These results confirm common sense: tax cuts lose revenue, tax increases raise revenue, and the general effect on economic growth (beyond temporary effects during an economic slump) is slight.

End Notes:

[1] Bud Newman and Nancy Ognanaovich, “Nussle’s New Budget Enforcement Bill To Apply To Spending, Not To Tax Cuts,” Bureau of National Affairs Daily Tax Report, March 17, 2004.

[2] Council of Economic Advisers, Economic Report of the President, February 2003, pp 57, 58.

[3] N. Gregory Mankiw, Principles of Economics (Fort Worth, TX: Dryden, 1998), pp. 29-30.

[4] In its August 2003 Budget and Economic Outlook, CBO finds that the revenue measures enacted since 2001 could “…boost the level of potential GDP by as much as 0.3 percent or reduce it by as much as 0.1 percent over the years 2004 to 2008.  From 2009 to 2013, it could reduce the level of potential GDP by about 0.4 percent.”  In regard to the macroeconomic effect of the 2003 tax bill, the Joint Committee on Taxation reached similar conclusions.  See: CBO, The Budget and Economic Outlook: An Update, August 2003, p. 45; JCT, “Macroeconomic Analysis of H.R. 2: The Jobs and Growth Reconciliation Tax Act of 2003,” Congressional Record — House of Representatives, May 8, 2003, pp. H3829-H3832.

[5] William W. Beach, Ralph A. Rector, Alfredo Goyburu, and Norbert J. Michel, “The Economic and Fiscal Effects of the President’s Growth Package,” Heritage Foundation, April 16, 2003.