Did Bush-Era Tax Cuts Cause the Deficit?

June 15, 2011

A New Analysis of Congressional Budget Office Projections and the Role of Bush-Era Tax and Spending Policies

Washington, DC, June 15, 2011 — Contrary to recent reports which assign the lion’s share of the current federal budget deficit to Bush-era tax cuts, a new analysis from the Tax Foundation finds that the growth in federal spending, both on-budget and via the tax code itself, is the real culprit.

Using recent data from the Congressional Budget Office, Tax Foundation economist William McBride finds that while economic policies of the previous administration contributed to the substantial federal budget deficits we see today, the effect was most pronounced on the spending side of the equation rather than the tax side.

In recent years tax revenues have largely tracked the economy and did not significantly drop below the historical average until the 2008 financial crisis – seven years after the first Bush tax cut and five years after the second Bush tax cut. It is spending, more than revenues, which has changed dramatically and diverged from the historical averages, jumping from 20.7% of GDP to 25% between 2008 and 2009 alone.

“Entitlement spending has roughly doubled in the last forty years as a percentage of GDP and is projected to remain there into the foreseeable future,” said McBride. “The effects of the last decade’s tax cuts is marginal compared to this massive budgetary liability.”

The study also explains that a growing share of spending actually occurs within the tax code, via so called tax expenditures. The earned income tax credit and the child credit refunds to those who pay no income tax, for example, nearly doubled between 2000 and 2008, from $40 billion to $72.5 billion. With this in mind, it would be closer to the truth to say that Bush-era spending rather than Bush-era tax cuts caused the deficit.

Tax Foundation Fiscal Fact No. 273, “The Budget Debate in Pictures: A Look at CBO Projections and the Role that Bush-Era Tax and Spending Policies Play in the Deficit” by William McBride is available here.

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