Saturday, May 21, 2011

Why the Bush tax cuts will matter more

Anonymous posted the following good question in the Comments section of yesterday's blog:

Please explain this to me - tax cuts were implemented in the early 2000's and by 2007 our deficit was only roughly $160 billion. So how could the same tax rates today that we've had for a while now account for such a large percentage of the deficit going forward? The massive increases in the annual deficits to over a trillion a year are in large part due to the Bush tax cuts when in 2007 we had much smaller deficits and the same rates? Doesn't make sense to me. Something else must have changed which caused the deficit to increase so much.

I think this is an important point. In the early 2000's there was not much of a war in Afghanistan and just the beginning of the war in Iraq (in other words, no "surges"). The second lie the Bushies told was that the war in Iraq would "pay for itself" out of oil revenues. (The first was the WMD nonsense.) This never happened and, in fact, the war was basically off-budget. In other words, bookkeepers never let the expenses appear as items in Bush's budget and they were never voted on. Money was shifted or borrowed from various accounts (probably Social Security, e.g.). The full fraud involved here is only now beginning to surface. The official deficits at this time were artificially low -- just like the official value of subprime mortgage-backed securities.

In addition, tax revenues from all sources, even taking into account the Bush tax cuts, were still reasonable, since the U.S. had just come out of a recession that was part of the usual business cycle -- even though this recovery, as I've pointed out, was less robust than previous ones, due to the tax cuts.

In any case, the situation was altered radically by the speculation-induced Great Recession which started around 2008. Business did poorly and many people lost their jobs; even rich folks had diminished incomes. The economic contraction was such that the Bush tax cuts were less significant since general income and wealth was in a severe downturn, so nearly everyone paid less taxes. As Anonymous pointed out, things began to change after 2007.

In the past year or so, as we started to recover from this recession, the incomes of wealthy folks started to take off again. (Not so the incomes of the non-rich, unfortunately). Now the effect of the Bush tax cuts becomes significant again, since the rich are getting richer once again, and we are not collecting the money we need from them. Down the road, as the economy rebounds, this will be even more the case. Since the experience of the past half century is that, in what now passes for a "healthy" U.S. economy, middle-class wealth and income is basically static, but upper class income increases, we see that the significance of the Bush tax cuts for the wealthy will be more and more significant down the road.

I am a mathematician not an economist, but this is my understanding of the situation. I encourage any economists reading this to post comment on this topic. Thanks to "Anonymous" for raising this point.

2 comments:

  1. You didn't answer my question - how could the "Bush tax cuts" be responsible for so much of our current deficit if we had the same tax rates in 2006 and 2007 and deficits were only about $200 billion?

    ReplyDelete
  2. You are not reading my answer.

    1. Had it not been for the tax cuts, there might have been a surplus in 2007 (there was when Bush took office, or close to that).

    In other words, when the economy was doing OK in 2007, and the Iraq war was off the books, the deficits were, or seemed small. This masked what was being lost due to the tax cuts.

    2. This is not 2007. We had the worst recession in more than half a century subsequent to 2007. Total revenues were radically down and the expense of the wars can no longer be hidden.

    3. This is 2011 and we are recovering, somewhat, from the recession. We have always depended on increased tax revenue during recovery to make up for the deficits caused by a recession. This didn't happen very much during the Bush recovery, and is happening less during the Obama recovery -- in both cases because of the tax cuts.

    No one said that the tax cuts are the only factor in the big deficit, but they are the single largest fact (i.e. bigger that each of the other factors). Combined with the actual costs of two wars (now finally being taken into account), the two make up more than half the projected deficits down the road. Note that by "the tax cuts" I mean ALL: not just the tax on the wealthy (though their incomes have recovered and will recover far better than those of the middle and lower classes).

    This was all said in the blog you are responding to.

    4. Everything I've said has been documented in lots of other places, including the mainstream media. Go out and read for yourself, since you seem reluctant to either read or absorb what I've said.

    I am going to close further Comments on this subject unless there are new facts presented.

    ReplyDelete