The Bush Tax Cuts: Fiscal Effects on the Debt and Deficits

 2. The Tax Cuts caused the budget deficit and current national debt problem 

The second criticism of the Bush tax cuts is that they caused major budget deficits and thus greatly added to the national debt.  If this were true, from 2003 forward there would be increasing yearly deficits and greater increases in the national debt.  Like the previous analysis, the budget numbers must be normalized for population and inflation.  The population normalization is done by dividing the numbers by the total population to get the revenue and outlays per person.  The per person metrics allows analysis across years with different populations.  Inflation is normalized by using 2005 dollars for all the data.  The first portion of this analysis proved that more revenue was collected after the tax cuts than before.  That fact alone should dispel most of this myth but there is room for further analysis.



The following graph shows the revenue and outlays per person:



The data shows that both the revenue and the outlays increased after the Bush Tax cuts.  Between 2003 the total revenue per person increased by 58 percent while the expenditures increase by 54 percent.   Because the growth in revenues outpaced expenditures, the revenue still reduced the budget gap between the two from $1,256.00 per person (355 Billion overall) in 2003 to $571.00 per person (170 Billion overall).  In absolute terms this shows a decreasing deficit over the time directly following the tax cuts.  Although the deficits were smaller, they still existed and added to the national debt during this time. The following graph shows this trend:





The per person deficit dramatically decreased as a result of the tax revenue increases that was realized from 2003 to 2007.  As of 2003 the annual budgets were operating in large deficits and it began to subside after the Bush Tax cuts.  One of the largest drivers of spending during this time was the Iraq and Afghanistan Wars.  This analysis does not look at the political policy decisions, only what actually happened and the circumstances that existed around them.  Without the extra military spending, it is safe to say that overall outlays would have been much lower and the revenue would have been at least the same since the Iraq War did not affect domestic tax policy.  The rough yearly costs of the war were  80 billion in 2003, 110 billion in 2004, 82 billion in 2005, 110 billion in 2006, 170 billion, and 190 billion in 2008.  These expenditures are not insignificant and their absence would have drastically reduced the budget deficits.  The large deficit increases begin again in 2007 as the deficit reaches $1,600.00 per person.  It is interesting of note that the power in congress shifted to the Democrats, who have affinity to public spending, in 2006 and their first budget was 2007. 

 The following graph shows the percentage change in the revenue and outlays.  It reiterates the trend that the revenue was actually growing faster than the outlays.



 Collectively the data shows that the tax cuts did not prevent the revenue from growing in relation to the outlays from 2003 to 2007.  As a result the yearly budget deficit decreased up until 2007.  The recession officially began at the end of 2007 and thus decreased the revenue greatly but at the same time, the government expenditures exploded to levels never seen before.  Expenditures per person grew by 8 and 16 percent in 2008 and 2009 compared to -2 and -17 percent decreases in revenue over the same time.  This difference increased the yearly budget deficit from 538.00 (160 Billion overall) per person in 2007 to 1,523.00 (458 Billion overall) in 2008 and up to 4,649.00 (1.4 Trillion overall) in 2009.

In absolute terms, the budget in 2003 was operating in a deep deficit but it decreased yearly up until 2007.  After that point, the deficit increased exponentially in 2008 and 2009 due to the vast expansion in government spending related to the stimulus and federal bailout programs.  The government spending reached levels not seen for decades and combined with the drastically smaller tax revenue streams dramatically erased any gains that were realized from 2003 to 2007.  The myth about the Bush Tax cuts state that the cuts created and deepened the budget deficits.  Based on this data, that assertion is false because the budget deficits decreased after the tax cuts and the budget began 2003 in a deficit that was not caused by the cuts.  It is important to note that it is true that the tax cuts did not ultimately solve the budget deficits, but the the expansion of expenditures greatly dampened their effect.

The Debt

The second part of this myth involves the national debt.  The national debt is the total amount that the Federal Government owes its creditors.  The creditors can range from private individuals, corporations, hedge funds, foreign citizens, and foreign countries to name a few.  Every year that the Government spends more money than it collects in revenue, it must borrow the difference and add that amount to the national debt. 



The yearly percentage change in the Federal debt is shown in the following graphic:

Notice that the yearly change shot up to 10 percent prior to 2003, the revenue structure was a constant over this time but expenditure decisions change yearly.  This shows evidence that the major driver of the Federal Debt is the yearly changes in expenditures.  As the Federal revenue started to increase after 2003. the changes in the Federal Debt began to decrease.

The federal debt as a percentage of the real GDP gradually increased from 2003 to 2007 from 61.57 to 64.57 percent and up to 69 percent in 2008.  An increase in this measure can mean one of three things, the debt was increasing faster then the increase in real GDP, the debt remained constant while the real GDP decreased, or both decreased but the debt decreased by a smaller rate.  Based on the data the second option was the case as the increases in the federal debt grew faster than the real GDP.

In conclusion of all the data available, a number of facts can be deduced.  From 2003 to 2007, the revenue grew faster than the expenditures even though the absolute value of the expenditures were greater, which allowed the debt increases to slow down.  Although the budgets continued to add to the overall debt, the smaller deficits added to the debt by smaller amounts up until the large stimulus and bail out expenditures.  The data shows that the deficits, after the passage of the Bush Tax Cuts, still added to the deficit, but the deficits became smaller with each successive year.  The fact that the expenditures continued to grow at a strong pace, signals that expenditures were responsible for the deficits, not the alleged shortage of revenue.  Part one of this analysis showed that the overall revenue increased in absolute terms which means a lack or revenue can not be blamed for the deficits.  The currents debt problem is largely the result of a decade of defense appropriations, stimulus, bail outs, and careless public program expansion.  The data shows the unprecedented increases (post WWII) in government expenditures greatly accelerated the debt growth not the disparity because the growth after 2009 dwarfs the growth during the entire Bush Administration.  Over the entire eight year Bush term, the national debt increased by 5 trillion dollars compared to 6 trillion over the first four years of the Obama administration.  The current debt crisis has been brewing for a long time but was exponentially intensified by the dramatic drop in revenues during the recession and the drastic increase in government expenditures in 2008 and 2009.