February 12, 2003


by Richard Kogan


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Over the last two years, the federal budget has gone from surplus to deficit.  At the same time, Congress enacted major tax cuts.  What role did those tax cuts play?  Mitchell Daniels, the Director of the President’s Office of Management and Budget, has characterized the role of the tax cuts as “minor” and said that the budget would be in deficit even without them.  The three short analyses that constitute this paper examine this question, based on the extensive data that the Congressional Budget Office issued in late January.  The analyses find the following:


Structure of This Analysis

This analysis takes the form of three short papers that examine the role of tax cuts in three ways.

Part 1 uses new estimates issued by CBO to compare the estimated deficits in 2003 and 2004 with the actual surplus in 2000.[1]  It addresses the question, “How much of the budget deterioration from the actual surplus in 2000 to the estimated deficits in 2003 and 2004 has been caused by enacted tax cuts?”

Part 2 uses new CBO estimates to compare the estimated deficits in 2003 and 2004 with projections for 2003 and 2004 that CBO issued in January 2001.  It addresses the question, “How much of the deterioration in the projected budget is attributable to the tax cuts?”  In other words, Part 2 compares two-year-old projected budget figures for 2003 and 2004 with the most up-to-date CBO projections for 2003 and 2004.

Part 3 examines the claim that the economy would have been even worse without the 2001 tax cuts.  If the tax cuts stimulated the economy (and therefore generated some extra revenue), the net cost of the tax cuts would be less than CBO reported.  Using an analysis by the President’s Council of Economic Advisers that is favorable to the Administration, we translate the positive “economic feedback” assumed by the CEA into a favorable estimate of “revenue feedback.”  Part 3 then compares the results found in Part 1 and Part 2, using CBO estimates, with the more favorable view of the net cost of the enacted tax cuts implied by the CEA estimates.

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End Notes:

[1]   All estimates of the cost of the tax cuts enacted in 2001 and 2002 come from a publicly available table that CBO issued as backup to its recent annual report, The Budget and Economic Outlook: Fiscal Years 2004-2013, January 29, 2003.  In this table, CBO shows the cost through 2011 of all legislation enacted since 2001.  The table also shows the amount by which projected payments of interest on the debt have increased because legislation causes the debt to be higher than projected in 2001.  The figures we use in this analysis for the cost of legislation cover both the direct costs of such legislation (e.g., the revenue losses from a tax cut) and the interest costs.
 In addition, the CBO table shows the amount by which surpluses projected in 2001 have decreased for reasons other than legislation and interest on it, i.e., because the 2001 projections were based on economic and related assumptions that are now recognized as having been overly optimistic.