The Simple Story: Tax Cuts Lose Revenues
End Notes
[i] In each case, the period chosen is the final fiscal year before the start of a recession. That fiscal year is as close as we can get to a “business-cycle peak,” given that we are dealing with fiscal years. Economic growth is measured over the same fiscal-year periods, for comparability, and differs slightly from that which would be seen if it were measured on a calendar-year basis, or on a quarterly basis between official business-cycle peaks. The first year of every period represents the base year from which growth is measured; e.g., the period 2000-2015 uses 2000 as the base year and measures the growth that occurred in 2001 and each subsequent year through 2015.
[ii] To be sure, tax cuts do not permanently slow the average annual growth rate of revenues. Rather, they reduce revenues to a new, lower level as the tax cuts phase in. Thereafter, revenues tend to grow at normal rates (slightly faster than the economy), but since they are growing from a lower base level, total revenues continue to be lower than what they would have been without the tax cuts. Thus, in comparing the level of revenues before a set of tax cuts to the level of revenues at any point after the tax cuts, the average growth rate is reduced because the end point is reduced.
[iii] Figures after 2004 are taken from CBO’s Economic and Budget Outlook, January 25, 2005. The revenue levels reflect CBO’s official revenue baseline, adjusted for the assumed continuation of expiring tax provisions and indexation of the Alternative Minimum Tax. The adjustments are shown in Table 1-3 of the CBO report.