Can tax cuts really pay for themselves?

The Congressional Budget Office just came out with a preliminary analysis of the president's budget, and it doesn't look promising.

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Congressional Budget Office Director Douglas Elmendorf testifies before a House Budget Committee hearing on the CBO's Budget and Economic Outlook report on February 10, 2011.

The Congressional Budget Office’s (preliminary) Analysis of the President’s Budget just came out. Will have more to say after a more careful read this weekend, but a few things immediately jump out from the main tables in the report:

  1. Deficits under the President’s budget proposals as estimated by CBO are more than $2.2 trillion higher than estimated by the Administration. (Ten-year deficits are $9.470 trillion according to CBO, vs. $7.205 trillion according to the Administration’s Office of Management and Budget. See bottom lines on Table 3, page 18.)
  2. CBO estimates the total cost of the President’s proposals to be $2.733 trillion over ten years. The great bulk of this (85%) is the cost of proposed tax cuts, at $2.331 trillion–without including any additional interest costs associated with these tax cuts.
  3. In fact, if you decompose the cost of the spending proposals into mandatory, discretionary, and net interest effects, you find that the contribution of tax cuts is more than 100 percent of the total cost. Again from Table 3, the President’s mandatory proposals cost $1.335 trillion over ten years, and his discretionary proposals save $1.452 trillion over ten years, for a net $117 billion in savings without interest. In other words, the higher net interest costs of $519 billion over ten years are due entirely to the deficit-financed $2.3 trillion in new tax cuts.
  4. It is only coincidental that the difference between CBO’s estimate of deficits under the President’s proposals and the Administration’s (OMB’s) own estimate ($2.2 trillion) is almost identical to CBO’s estimate of the cost of the tax cut proposals ($2.3 trillion). But it effectively means that through the Administration’s rosier assumptions (which I hope to investigate further), they are implicitly suggesting–or at least not contradicting–the notion that tax cuts pay for themselves. On the Administration’s part there seems to be some implicit denial about what this tax-cut-monopolized budget means for the deficit.

Oops! Somehow this doesn’t seem like a very good start on our path to fiscal sustainability.

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