Correlation Doesn’t Prove Causation, Bush Tax Cuts Edition

July 27, 2010

The expiration of the so-called Bush tax cuts is all over the news this week and likely will remain a topic of conversation for the next 60 days. The rhetoric is heating up from all sides, and like most of what comes out of the mouths of partisans, it should be taken with a grain of salt. Politicians appeal to voters most often via a simple message, which often involves putting things in black and white. A prime example of this is trying to equate correlation with causation. Two cases in point:

Correlation Doesn't Prove Causation Republican Edition: Many Republicans point to the fact that revenues increased following the tax cuts, thereby somehow proving that the tax cuts caused revenues to rise. The reality is that to get a true answer to the question of the revenue impact of the tax cuts, one must hold all other factors constant and ask what would have happened if not for the tax cut. Judging by almost all serious analyses, the tax cuts did not have such a large enough positive impact on economic growth so as to completely pay for themselves. That doesn't mean they were bad policy necessarily (unless you are judging policies solely on the basis of revenue maximization), but the free lunch selling of the tax cuts is not something the public should buy.

Correlation Doesn't Prove Causation Democrat Edition: Many Democrats have recently tried to lump the currently struggling economy and the financial crisis with Bush's tax cuts. Again, merely because the tax cuts occurred and then the recession occurred does not mean X caused Y. The same goes for the Clinton tax hike in 1993 and the booming economy of the 1990s. The technological boom was largely independent of the Clinton tax hike (i.e. the economy would have grown fast regardless). You can say that the Bush tax cuts were not good policy because they made the future fiscal situation worse than it already was, but that doesn't mean they are responsible for the financial crisis of 2008. (You could make a better case that they are responsible for the future fiscal crisis of 2040, and you could also say the same about Bush's senior vote-buying prescription drug bill passed in 2004.)


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