Monday, August 14, 2006

More on Rosie Scenario

Late last month, I commented on the report by the Treasury, A Dynamic Analysis of Permanent Extension of the President's Tax Relief. At the time, I said:
The report, apparently authored by noted government economist Rosie Scenario, states that its projections will only be achieved if there is "an offsetting change in government revenues or spending." In other words, there will be significant budget deficits as a result of the tax cuts unless we cut government services.
A just released memorandum by Jane Gravelle of the CRS commenting on the Treasury report states that:
The fact that revenues must be made up by spending cuts clearly acknowledges that the tax cuts do not pay for themselves. But what is the magnitude? According to CBO projections, individual income taxes would be 8.4% of GDP in FY 2009 and 9.8% in FY2012, suggesting that the tax cuts are about 1.4% of GDP. For the base case reported above, output increases by 0.5% in the short run and 0.7% in the long run. In the tax reform study, Treasury indicated the marginal tax rate on labor income was 24% and the marginal rate on capital income 14%. Using an overall rate of 20%, the offsetting revenue gain from induced economic effects would be 0.1% of output, or 7% of revenue loss in the next five years.
Stated more succinctly, notwithstanding the baloney dished out by the Republicans to the effect that tax cuts will generate more government revenue, the additional revenue will only be equal to 7% of the revenue lost from the tax cuts. In other words, to paraphrase Merle Travis (by way of Tennessee Ernie Ford), Republican tax cuts make most of us just another day older and deeper in debt.

Hat Tip: TaxProf.

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