The History of 1.3 Trillion Dollars

Republicans, committed to fiscal discipline during the 1990s, let out all the stoppers in the decade that followed.

Spending INCREASED dramatically for two wars and an expensive prescription drug program—nothing too good when it was put on the credit card. 

The problem got worse with trillions of dollars in unpaid-for tax cuts forced into every millionaire and billionaire’s pocket.

This, of course, took place during the presidency of George Bush, but not without a helping hand from Democrats.

The period from 2001-2011, the biggest contributor to the disappearance of vastly estimated surpluses ($4.3 trillion), followed by incorrect revenue estimates ($3.3 trillion) by the Congressional Budget Office, brings us to where we are today.

The two big tax cuts during the Bush years are estimated to total about $1.5 trillion,

Many of the tax cuts continued into the early years of the Obama presidency. In December a deal with Republicans to extend them even more, brings us to $2.8 trillion.

The Iraq and Afghanistan wars was $1.26 trillion through 2011 and the Medicare prescription drug program totaled $272 billion.

Fortunately, the actual size of the Bush tax cuts might be lower because they were based on revenue estimates that ultimately fell far short of what was predicted in 2001.

The true “cost” to the Treasury may never be known. (Another way of saying we are totally out of control.) 

Bush instituted the two big tax cuts, the one in 2001 and another in 2003.

The first was implemented amid rosy predictions of a 10-year, $5.6 trillion surplus; the second was enacted after the economy appeared to stumble after the Sept. 11, 2001, attacks.

So, if the economy is rosy, tax cuts...but if the economy appears to stumble, more tax cuts. Let me write that down.

When the tax cuts were passed, the Joint Committee on Taxation estimated how much they might reduce revenue: the 2001 tax cuts was pegged at $1.35 trillion over 10 years; the 2003 tax cut was set at $350 billion over 10 years.

Those estimates have never been updated, even as the economy and the budget moved on.
Here are two ways to look at how the 2001 numbers might be different today.

First, although the JCT has not gone back and rescored the 2001 tax cuts, the committee recently estimated the revenue impact of virtually the same tax cut—the two-year extension negotiated by President Obama and the Congress.

For simplicity, and because some elements were changed in other parts of the tax cut, let’s focus just on the reductions in individual taxes.

Lets.

In 2001, the JCT estimated that the tax-rate package would reduce revenues by $115 billion in 2010.

In December, the extension of those tax rates in 2012 was estimated to cost $105 billion.

The $10 billion difference means the cost of the tax rates rose about 5 percent each year.

At that trend, the 2001 prediction of the 2012 tax rate package would have been about $126 billion.

In other words, the current estimate of the cost of the 2012 tax rate reductions is 17 percent lower than what would have been predicted under the 2001 methodology.

Are your eyes glazing over yet?

This shift, however, appears to be largely because of the impact of the recession, which devastated all government revenues.

The reduction is less dramatic if you go back all the way to 2001.

It was lower for each year, and we used the resulting ratio to adjust the size of the tax cut for each year.

Under this method, for most years, the impact was minimal, just a slight reduction.

But when the recession hit in 2008, and the GDP turned out to be 10 percent below predictions for three straight years, the cost of the tax cut was reduced by billions of dollars each year.

Over the 10-year period, the overall size of the tax cut dropped about 5 percent, or $65 billion, to $1.285 trillion.

Some people might call that a rounding error in the context of a ten-year federal budget.

The Bottom Line

There certainly might be other ways to calculate the actual impact of the tax cut.

It seems clear that the impact was less during the recession—though one could argue that government’s fiscal condition would be much better if those revenues had been collected.

No matter how you count it, nearly $1.3 trillion is a lot of money.

I forgot where I got these numbers from...does it really  matter?