That voodoo that they do

When last we left the Bush economic team and its defenders, they were predicting that tax cuts wouldn’t cause revenue to drop very much at all. The naysayers, they insisted, were just a bunch of Keynesian liberals who failed to grasp the power of tax cuts to unleash the dynamism of investors and entrepreneurs.

Since then, revenues didn’t just fall, they utterly collapsed. In 2003, income tax revenues as a share of the economy fell to their lowest point since before World War II -- when, needless to say, the government was a lot smaller.

The Bushies have had almost nothing to say about this inconvenient fact, until this month, when tax revenues began rising again. Now, they suddenly want to bring the topic of revenues back up. White House budget director Josh Bolten gloated, “We got to this point largely because of the president’s pro-growth policies, especially tax relief.”

And the Wall Street Journal’s Stephen Moore asserted in a column last month that the rising revenue has vindicated supply-side economics. Moore’s column was so overflowing in its enthusiasm that it described rising revenues with terms like “surged,” “eye-popping,” “unexpected gush” and “exploded like a cap let off a geyser,” suggesting that he has either been profoundly influenced by the literary style of e-mail spam or is harboring some deep-rooted sexual frustration.


So, are the supply-siders right? Of course not.

First, the rise in revenues mainly reflects temporary factors. Economic growth is nothing special at this point in a business cycle, and revenue from individual income tax withholdings -- that is, regular wages -- are actually growing very slowly. As Mark Zandi of has noted, the primary factor is the red-hot housing market, which is causing capital gains, as well as bonuses for brokers and underwriters, to skyrocket. A second factor is the hot stock market from 2004, which is already cooling. On top of that, a provision in a 2004 tax bill encouraged corporations to bring home overseas profits right away, causing them to pay more in taxes in 2005 but less in subsequent years.

The upshot of all this is that a bunch of short-term factors have come together to cause revenues to shoot up this year. It has nothing to do with President Bush’s “pro-growth” tax cuts, unless you think the tax cuts have somehow caused the housing run-up.

But suppose that weren’t the case. Suppose the rise in revenues is permanent -- anything’s possible, after all -- and suppose further that Bush’s tax cuts caused it all to happen. That still doesn’t vindicate the tax cutters.


Basically, for the last three years, revenues have continuously come in well below expectations. One year of over-performance can’t possibly make up for all those years of underperformance. As the Center on Budget and Policy Priorities notes, revenues are still expected to come in $91 billion below where they were projected to be in 2002, even taking into account all the tax cuts enacted since then.

Imagine the Bushies as investment advisors who urge you to buy a stock, promising it will grow 20% a year. Instead the value of the stock drops for several years in a row, until finally it begins rising, but not nearly enough to cover the loss. If these advisors tried to claim they’d been proved right, you probably wouldn’t take them seriously.

The only way the federal budget looks good is if you pretend history began last year. Bolten bragged that the deficit is supposed to drop this year to a mere $333 billion. That’s not a terribly huge number by normal standards. But given that we’re already four years into an economic expansion, it’s awful. It’s fine to run deficits when the economy runs into trouble. When it’s humming along, you should have a balanced budget, or even surpluses.

Bolten predicted the deficit would be down to $162 billion by 2009. But that figure rests on all sorts of implausible assumptions, including that the fighting in Afghanistan and Iraq will cost nothing after next year.


But even if he’s right, it’s pathetic: The Bushies expect that after eight years of economic expansion, we’ll still be borrowing, rather than paying off our bills.

At the peak of the last economic expansion, when Bill Clinton was president, we actually eliminated the deficit and began paying off the national debt. If tax cuts really cause revenues to rise, why are we doing so much worse this time around?