The Top 10 Myths About the Bush Tax Cuts

As we approach the deadline for filing federal income taxes just about a month and a half from now, and as the debate about extending or repealing the Bush tax cuts heats up, I wanted to share with Associated Content readers and writers the top 10 prevailing myths about the Bush tax cuts, as compiled by the Heritage Foundation. The following list was prepared by Brian Riedl at Heritage, and includes some of my own observations about the Bush tax cuts.

Myth Number 10: The Bush tax cuts were tilted toward the rich.

Fact: The rich pay even more of the burden now. From 2000 to 2004, the share of all individual income taxes paid by the bottom 40% of taxpayers dropped from 0% to -4%, meaning that the average family in those quintiles received a subsidy. The share paid by the top 20% of households increased from 81% to 85%. I can personally vouch for this. I have actually received a refund amount larger than the amount of taxes I paid. So has my brother. That means the government took money, in the form of taxes, from someone else and gave it to me. That is the redistribution of wealth and is a fundamental tenet of socialism.

Myth Number 9: The Bush tax cuts have not helped the economy.

Fact: The economy responded strongly to the 2003 tax cuts. The 2003 tax cuts lowered income capital gains and dividend tax rates. These policies increased market incentives to work, save and invest, creating jobs and increasing economic growth.

Myth Number 8: Tax cuts help the economy by "putting money in people's pockets."

Fact: Pro-growth tax cuts support incentives for productive behavior. Government spending does not "pump new money into the economy," because government must first tax or borrow that money out of the economy. The right tax cuts help the economy by reducing government's influence on economic decisions and allowing people to respond more to market mechanisms. I will add that tax cuts at the lowest levels do in fact put money in people's pockets, and those people are likely to spend it. But this is only a temporary phenomenon. Tax cuts have to be targeted at those areas and people that will spur long-term economic growth and not short-term spurts in economic activity.

Myth Number 7: Reversing the upper-income tax cuts would raise substantial revenues.

Fact: The low-income tax cuts reduced revenues the most. In 2007, the increased child tax credit, marriage penalty relief, 10% bracket and Alternative Minimum Tax fix will have a combined budgetary impact of minus $114 billion-without strong supply-side effects to minimize that effect. But the more maligned capital gains, dividends and estate tax cuts are projected to reduce 2007 revenues by just $36 billion, even before the large supply-side effects are incorporated.

Myth Number 6: Raising tax rates is the best way to raise revenue.

Fact: Tax revenues correlate with economic growth, not tax rates. Since 1952, the highest marginal income tax rate has dropped from 92% to 35%, and tax revenues have grown in inflation-adjusted terms while remaining constant as a percent of GDP.

Myth Number 5: The Bush tax cuts are to blame for the projected long-term budget deficits.

Fact: Projections show that entitlement costs will dwarf the projected large revenue increases. Revenues are projected to increase from 18% of GDP to almost 23% by 2050, while spending is projected to increase from 20% of GDP to at least 38%.

Myth Number 4: Capital gains tax cuts do not pay for themselves.

Fact: Capital gains tax revenues doubled following the 2003 tax cut. In 2003, capital gains tax rates were reduced from 20% to 10% (depending on income) to 15% and 5%, respectively. Rather than expand from $50 billion in 2003 to $68 billion in 2006 as the CBO projected, capital gains revenues more than doubled to $103 billion.

Myth Number 3: Supply-side economics assumes that all tax cuts immediately pay for themselves.

Fact: It assumes replenishment of some but not necessarily all lost revenues. Supply-side economics never contended that all tax cuts pay for themselves. Rather the Laffer Curve merely formalizes the common-sense observations that: tax revenues depend on the tax base as well as the tax rate; raising tax rates discourages the taxed behavior and shrinks the tax base, offsetting some of the revenue gains; and lowering tax rates encourages the taxed behavior and expands the tax base, offsetting some of the revenue loss.

Myth Number 2: The Bush tax cuts substantially reduced 2006 revenues and expanded the budget deficit.

Fact: Nearly all the 2006 budget deficit resulted from additional spending above the baseline. Historic spending increases pushed federal spending up from 18.5% of GDP in 2001 to 20.2% in 2006. I will add that the biggest problem is earmark spending. Last year alone, according to Citizens Against Government Waste, Congress had over 15,000 earmark projects costing taxpayers billions of dollars.

Myth Number 1: Tax revenues remain low.

Fact: Tax revenues are above the historic average, even after the tax cuts. Tax revenues in 2006 were 18.4% of gross domestic product (GDP), which is actually above the 20-year, 40-year, and 60-year historical averages.