Paul Krugman Factually Wrong on Republicans’ Scheme on Bush Tax Cuts

August 23, 2010

Paul Krugman had a column in Sunday's New York Times on the Bush tax cuts. He opposes extending the tax cuts, of course, and he makes some valid points. But in taking political shots at Republicans, Krugman makes this supposedly factual claim regarding the background of the tax cuts:

Some background: Back in 2001, when the first set of Bush tax cuts was rammed through Congress, the legislation was written with a peculiar provision — namely, that the whole thing would expire, with tax rates reverting to 2000 levels, on the last day of 2010.

Why the cutoff date? In part, it was used to disguise the fiscal irresponsibility of the tax cuts: lopping off that last year reduced the headline cost of the cuts, because such costs are normally calculated over a 10-year period. It also allowed the Bush administration to pass the tax cuts using reconciliation — yes, the same procedure that Republicans denounced when it was used to enact health reform — while sidestepping rules designed to prevent the use of that procedure to increase long-run budget deficits.

Notice the part in bold. I don't know if Krugman just miscounted, assumed that the cuts didn't go into effect until 2002, or just made up the accusation, but Republicans did not lop off the last year to reduce the headline costs of the tax cuts.

Even though the cuts were signed into law in May 2001, some of the tax cuts went into effect in 2001. This included the 2001 rebate checks, which were equivalent to the 10 percent bracket. Cuts in some ordinary marginal tax rates also went into effect in 2001.

There was no final year that was lopped off.

As JCT explained here back in 2001:

To ensure compliance with the Congressional Budget Act of 1974, the conference agreement provides that all provisions of the bill generally do not apply for taxable, plan or limitation years beginning after December 31, 2010.

It is true that provisions in calendar year 2010 affect fiscal year 2011 revenue scores, but that's because three months of calendar year 2010 are actually in fiscal year 2011. (Technically, tax planning assumptions made by JCT can affect revenues in tax years beyond even a 10-year budget window.)

Note: If Krugman wanted to accuse Republicans of fiscal irresponsibility regarding the headline cost of the tax cuts, he should have pointed out that AMT masked a significant portion of the initial cost estimate of the tax cuts. And assuming Republicans knew a patch would happen every year, they were able to make the tax cut package larger without adding to the headline cost.

Update: Krugman appears to obtain this factoid from a May 2001 Washington Post article, which claims that Republicans could have extended it through fiscal year 2011. Unfortunately, fiscal year 2011 is not the same as calendar year 2011, which means that had Republicans extended it into calendar year 2011, the bill would have directly affected fiscal year 2012 revenues.


Related Articles