by Benjamin Landy
As the debate over the debt ceiling slogs along in Washington, it's instructive to step back and look at how the federal balance sheet has evolved since the end of World War II. Until the 1970s, tax revenues and spending levels were fairly closely aligned. Significant deficits began to arise in the aftermath of the OPEC oil shocks, which sent the economy into a period of high inflation and low growth. But deficits became much larger during the Reagan administration, caused mainly by his huge tax cuts and escalation of defense spending. Even though he was subsequently forced to raise taxes eleven times, Reagan was still unable to make a dent in the staggering $2.3 trillion debt that the United States accrued during his tenure.
Large deficits persisted through the George H.W. Bush administration, despite the tax increases he approved. But after the budget deal that Bill Clinton signed into law in 1993 without a single Republican vote in Congress, which included tax increases and spending reductions, deficits began to decline. Aided by a vibrant economy in the second half of the decade, deficits actually transformed into surpluses. Contrary to what supply-side ideology predicted, real GDP growth averaged 4 percent for the rest of the 1990s.
The sizable budget surplus of the Clinton years was intentionally erased by the Bush tax cuts of 2001 and 2003, reducing revenue by at least $2.9 trillion over the last decade, according to a recent Congressional Budget Office report; another $3.5 trillion in lost revenues is attributable to slowed economic growth. The additional cost of two wars and an unfunded Medicare drug benefit combined to create shortfalls that were even wider then during the Reagan era. According to conservative economist Bruce Bartlett, the interest cost on the deficits created by the Bush tax cuts are responsible for increasing the national debt by $3.2 trillion, or "27 percent of the fiscal deterioration since 2001." With the Great Recession, government revenues have crashed further even as spending on social safety net programs has risen, leading to even deeper deficits.
Still, the GOP continues to hammer away at the same, disproved talking-points. "There's no evidence whatsoever that the Bush tax cuts actually diminished revenue," Mitch McConnell (R- Kentucky) said last year. "They increased revenue because of the vibrancy of these tax cuts in the economy." Former Minnesota Governor and Republican presidential candidate Tim Pawlently recently echoed the sentiment: "Keep in mind, whether it be the Bush tax cuts, the Reagan tax cuts, or other tax cuts, they always produce an increase in revenue." But if that were true, you would expect tax revenues to be on the rise. Just the opposite: this year, in spite of some of the lowest tax rates in the nation's history, the CBO estimates that revenues will be just 14.4 percent of GDP, the lowest percentage since 1950.
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