# How Much Did the Bush Tax Cuts Cost in Forgone Revenue?

May 26, 2010

There is no definitive answer to the question of how much the Bush tax cuts cost the Treasury in foregone revenue from 2001 to 2010.

First, there is much disagreement pertaining to the feedback effect that resulted from the tax cuts. No tax cut that has significant marginal rate cuts, as the Bush tax cuts did, will cost the Treasury its full "static" score. Static in this sense means that people don't change their behavior when tax rates drop or rise: if a 40% tax rate raises $500 billion, then a 20% tax rate would raise $250 billion. This is wrong because people do change their behavior when faced with such starkly lower tax rates. They earn more money, which generates additional tax revenue. Just how much is hard to estimate.

When the Kennedy tax cut dropped the top income tax rate from 91% to 70%, or when the Reagan tax cut dropped it from 70% to 50%, it is quite possible that the lower rates raised more revenue than the old, higher rates would have. On the other hand, few if any of today's tax rates are so high that cutting them would generate a surge of income-producing activity so large that revenue would rise. There will certainly be a feedback effect, just not such a massive amount. When revenue rises after cuts in a moderate-to-high tax rate, it is usually because of economic activity that would have occurred without the tax cuts. Furthermore, a significant chunk of the cost of the Bush tax cuts has little effect on marginal economic behavior, such as the 10 percent rate creation, the increase of the standard deduction for married couples and the child tax credit increase. (These specific provisions could even cost more than their static score due to the "income effect.")

Second, unfortunately, no governmental organization such as Congress's Joint Committee on Taxation (JCT) has done a hindsight look at how much the tax cuts have cost. JCT did score the original tax cuts when they were proposed, but those scores required assumptions about future tax law and economic performance that turned out to be incorrect. However, many people still cite the original JCT estimate, which was that the Bush tax cuts

(2001 and 2003) would, over the 10-year period, allow taxpayers to keep $1.6 trillion dollars that they would have remitted in taxes under the Clinton-era rates. Among the various provisions, the largest was the new 10% tax bracket, which saved taxpayers $400 billion, or one-fourth of the total package.

The only place we could find a recent hindsight estimate of the cost of the Bush tax cuts came from the liberal Citizens for Tax Justice who used it as an opportunity to compare the Bush tax cuts' cost to health care reform. According to CTJ. the Bush tax cuts that were passed up through 2006 (the 2001 and 2003 cuts as well as other smaller cuts in 2004, 2005 and 2006) ended up costing the Treasury approximately $2.1 trillion in foregone revenue from 2001 to 2010. CTJ claims that if you add interest payments, that number goes up to around $2.5 trillion.

These numbers were calculated using CTJ's ITEP model. From what we could tell from their methodology paper, they assumed no feedback effect that would generate additional revenue. With that caveat, there is no reason to doubt these numbers. Therefore, the $2.1 trillion cost ($2.5 trillion with interest) on the Bush tax cuts is a high-end estimate. Note that also included in CTJ's $2.1 trillion estimate is the cost of annually adjusting AMT, which was technically not part of most of the "Bush tax cuts." (The annual cost of "patching" AMT went up as a result of the Bush tax cuts because the Bush tax cuts reduced mostly regular income taxes and taxpayers pay the higher of their regular income tax and their alternative minimum tax.)

Using CTJ's numbers, if one assumes that 20 percent of the tax cuts paid for themselves (overall), the non-interest cost would be approximately $1.7 trillion. If one assumes that half of the tax cuts paid for themselves (which we would consider to be a pretty extreme assumption), then the tax cuts would have cost around $1 trillion over the past 10 years.

Note: Neither the Tax Foundation, JCT, nor the Tax Policy Center have done a recent (i.e. post-financial crisis) hindsight analysis of the cost of the Bush tax cuts, which is why we cited CTJ's numbers exclusively.

Source: taxfoundation.org

Category: Taxes

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