Smaller Deficit Estimate No Surprise: New OMB Estimates Do Not Support Claims About Tax Cuts
End Notes
[1] Jane G. Gravelle, “Revenue Feedback from the 2001-2003 Tax Cuts,” Congressional Research Service, September 27, 2006.
[2] The February budget assumed the deficit in fiscal year 2007 would be $244 billion if the supplemental funding the President requested for operations in Iraq and Afghanistan was enacted, which it subsequently was. The administration estimates that the enacted supplemental appropriations will increase outlays in 2007 by $4.5 billion more than it estimated that the supplemental appropriations proposed in the budget would cost.
[3] In its June 6, 2007 Monthly Budget Review, CBO has indicated that the deficit estimate for 2007 in its upcoming August Budget and Economic Outlook: An Update will also be significantly lower than it had projected in January.
[4] This is the “root mean square” of the errors, which gives the average error without regard to the fact that errors in some years result from an overestimate of the deficit and errors in other years result from an underestimate of the deficit. (The root mean square is calculated by taking the square root of the arithmetic mean of the square of each year’s error.) Under this calculation, a 3 percent overestimate and a 3 percent underestimate are averaged together as a 3 percent error. Simply taking the arithmetic mean of a 3 percent overestimate and a 3 percent underestimate would yield an average error of zero (+3 plus -3, divided by 2 equals 0). In fact, the arithmetic mean of CBO’s deficit errors is 1.2 percent of actual revenues, which indicates that CBO’s underestimates and overestimates tend to offset each other over time. For an explanation of CBO’s analysis of estimating errors see Congressional Budget Office, The Uncertainty of Budget Projections: A Discussion of Data and Methods, March 2007.
[5] This tendency is offset to a large degree over time by a tendency to underestimate deficits as an economic expansion draws to a close and in the early years of an economic recovery.
[6] Overestimates at other points in the business cycle tend to offset this tendency; the arithmetic mean of CBO’s revenue errors for the current fiscal year, measured over the period since 1981, is only 0.3 percent of actual revenues. As an example, the initial underestimates of revenues in each of the last three years — 2004, 2005, and 2006 — followed three years of sizable overestimates of revenues in 2001, 2002, and 2003. Federal revenues actually declined in nominal terms for three years in a row in 2001, 2002, and 2003, marking the first time this had occurred since the 1920s.
[7] Despite statements by the President and Vice President that seem to suggest the tax cuts actually increased revenues above what would have happened without the tax cuts, even the administration has concluded that the economic feedback from the tax cuts could in the long run boost revenues by no more than 10 percent of the “static” estimate of the cost of the tax cuts, assuming the tax cuts are fully offset by reductions in spending. This is a very far cry from the tax cuts paying for themselves. See Jason Furman, “Treasury Dynamic Scoring Analysis Refutes Claims by Supporters of the Tax Cuts,” Center on Budget and Policy Priorities, revised August 24, 2006.
[8] See “Joint Press Release of the Council of Economic Advisers, the Department of the Treasury, and the Office of Management and Budget,” June 6, 2007. http://63.161.169.137/cea/forecast20070606.pdf
[9] See Aviva Aron-Dine, Chad Stone, and Richard Kogan, “How Robust is the Current Economic Expansion?”, Center on Budget and Policy Priorities, revised June 28, 2007.
[10] Proponents of the capital gains and dividend tax cuts enacted in 2003 argue that those cuts have provided the real economic impact and, therefore, that it is the performance of the economy since 2003 that matters. Even since 2003, however, growth in GDP, wages and salaries, and employment have been below average for a post-World War II recovery.
[11] See, Aviva Aron Dine, “The Effects of the Capital Gains and Dividend Tax Cuts on the Economy and Revenues: Four Years Later, a Look at the Evidence,” Center on Budget and Policy Priorities, July 10, 2007.
[12] Letter from Congressional Budget Office Director Peter R. Orszag to Senate Budget Committee Chairman Kent Conrad, May 18, 2007, http://www.cbo.gov/ftpdocs/81xx/doc8116/05-18-TaxRevenues.pdf
[13] See Aviva Aron-Dine, “New Data Show Income Concentration Jumped Again in 2005: Income Share of Top 1% Returned to Its 2000 Level, the Highest Since 1929,” Center on Budget and Policy Priorities, March 29, 2007.
[14] See, for instance, Richard Kogan, Matt Fiedler, Aviva Aron-Dine, and James Horney, “The Long-Term Fiscal Outlook is Bleak: Restoring Fiscal Sustainability Will Require Major Changes to Programs, Revenues, and the Nation’s Health Care System,” Center on Budget and Policy Priorities, January 29, 2007; and, “The Long-Run Budget Outlook” section of the Analytical Perspectives volume of the Budget of the United States for Fiscal Year 2008, February 5, 2007, pp. 183 – 192.
[15] Jane G. Gravelle, “Revenue Feedback from the 2001-2003 Tax Cuts,” Congressional Research Service, September 27, 2006.