Did Bush Tax Cuts Cause Big Deficits?

See 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 of the Tax Foundation. Excerpts:

"...revenues have largely tracked the economy and did not significantly drop below the historical average until the 2008 financial crisis, i.e. seven years after the first Bush tax cut and five years after the second Bush tax cut. Further, in the immediate response to the financial crisis, it is outlays, more than revenues, which have changed dramatically and diverged from the historical averages. Between 2008 and 2009, revenues dropped 2.6 percentage points, from 17.5 percent of GDP to 14.9 percent--3.1 percentage points below the historical average of 18 percent. Meanwhile, outlays grew 4.3 percentage points, from 20.7 percent of GDP to 25.0 percent--4.2 percentage points above the historical average of 20.8 percent.

Additionally, in 2000, before the Bush tax cuts, the CBO predicted 2010 outlays to be $2.457 trillion,[5] whereas actual outlays were $3.456 trillion - a $1 trillion under-prediction of spending. CBO predicted 2010 revenues to be $2.946 trillion, whereas actual revenues were $2.162 trillion - a $0.784 trillion over-prediction of revenues. Based on this, it seems logical to conclude that "Bush spending" more than "Bush tax cuts" are to blame for the deficit. Doing a similar analysis, Glenn Kessler at the Washington Post concludes the same.[6] This is also supported by another report recently issued by the CBO[7], in which they compare their projections from 10 years ago to the current reality and score the budgetary effects of various legislative items. In 2009, for instance, discretionary spending exceeded projections by $417 billion, and mandatory spending exceeded projections by $409 billion. This is far greater than the effect of the Bush tax cuts, which reduced revenues in 2009 by $181 billion.

Furthermore, a growing share of spending actually occurs within the tax code, via so called tax expenditures. For instance, the earned income tax credit and the child credit refunds to those who pay no income tax nearly doubled between 2000 and 2008, from $40 billion to $72.5 billion.[8] So, again, it would be closer to the truth to say that Bush-era spending rather than Bush-era tax cuts caused the deficit."

"Although there is a conspicuous "W" pattern in the Bush years, this is more a reflection of the 2001 and 2008 recessions than the Bush tax cuts. Note that the Bush tax cuts altered only the individual income tax code. However, in 2003-2004 revenues dropped most dramatically in the category of corporate taxes, which peaked in 1998 at 2.2 percent of GDP and dropped to 1.2 percent in 2003--a 41 percent decline. Compare this to individual income tax revenues, which peaked in 2000 at 10.2 percent of GDP and dropped to 6.9 percent in 2004--a 32 percent decline. Payroll and other taxes remained relatively stable, such that total revenues declined by 22 percent over this period.

It is much the same story in the aftermath of the 2008 recession, except the numbers are larger and more discouraging. Corporate tax revenues peaked in 2007 at 2.7 percent of GDP and bottomed out at 1 percent in 2009 -- a staggering 63 percent drop. Compare this to individual income tax revenues, which peaked in 2007 at 8.4 percent of GDP and dropped to 6.2 percent in 2010--a 26 percent decline. Again, payroll and other taxes remained relatively stable, such that total revenues declined by 19 percent over this period.

In fairness, it is not quite this simple, since a large share of businesses file under the individual income tax code and would have had a greater incentive to do so following the Bush tax cuts. Nevertheless, it remains true that the recent collapse in revenues is largely due to the economy. For instance, at the 2007 peak, individual and corporate tax revenues combined were 11 percent of GDP, which is above the 40-year historical average of 10.2 percent."

"Now let's turn to spending. It should be apparent from the graph of outlays above that we are currently in record territory in terms of spending as a percentage of GDP, and the CBO projects no return to normalcy. Mandatory spending, i.e. entitlement spending, has roughly doubled as a share of GDP, from 6.7 percent in 1971 to 13.2 percent in 2010. The CBO projects it to hit 14 percent next year and remain close to that level through 2021. Again, however, the CBO assumes a sharp reduction in Medicare payment rates at the end of this year, which has been pushed off repeatedly since 2003. They estimate that if payment rates remained at 2011 levels this would add about 3 percent to Medicare outlays over the next 10 years. Discretionary spending has actually declined as a share of GDP, from 11.3 percent in 1971 to 9.3 percent in 2010. It is projected to decline further to 6.7 percent in 2021. However, net interest payments are projected to increase, such that total outlays will remain well above the historical average of 20.8 percent of GDP. Based on CBO projections out to 2021, as well as their longer term projections out to 2035.[12] in every year spending as a share of GDP is expected to exceed any year prior to the financial crisis."