President Obama and congressional Democrats are blaming their trillion-dollar budget deficits on the Bush tax cuts of 2001 and 2003. Letting these tax cuts expire is their answer. Yet the data flatly contradict this "tax cuts caused the deficits" narrative. Consider the three most persistent myths:
The Bush tax cuts wiped out last decade's budget surpluses. Sen. John Kerry (D., Mass.), for example, has long blamed the tax cuts for having "taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see." That $5.6 trillion surplus never existed. It was a projection by the Congressional Budget Office (CBO) in January 2001 to cover the next decade. It assumed that late-1990s economic growth and the stock-market bubble (which had already peaked) would continue forever and generate record-high tax revenues. It assumed no recessions, no terrorist attacks, no wars, no natural disasters, and that all discretionary spending would fall to 1930s levels.
The projected $5.6 trillion surplus between 2002 and 2011 will more likely be a $6.1 trillion deficit through September 2011. So what was the cause of this dizzying, $11.7 trillion swing? I've analyzed CBO's 28 subsequent budget baseline updates since January 2001. These updates reveal that the much-maligned Bush tax cuts, at $1.7 trillion, caused just 14% of the swing from projected surpluses to actual deficits (and that is according to a "static" analysis, excluding any revenues recovered from faster economic growth induced by the cuts).
The bulk of the swing resulted from economic and technical revisions (33%), other new spending (32%), net interest on the debt (12%), the 2009 stimulus (6%) and other tax cuts (3%). Specifically, the tax cuts for those earning more than $250,000 are responsible for just 4% of the swing. If there were no Bush tax cuts, runaway spending and economic factors would have guaranteed more than $4 trillion in deficits over the decade and kept the budget in deficit every year except 2007.
The next decade's deficits are the result of the previous administration's profligacy. Mr. Obama asserted in his January State of the Union Address that by the time he took office, "we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program."
In short, it's all President Bush's fault. But Mr. Obama's assertion fails on three grounds.
First, the wars, tax cuts and the prescription drug program were implemented in the early 2000s, yet by 2007 the deficit stood at only $161 billion. How could these stable policies have suddenly caused trillion-dollar deficits beginning in 2009?
Second, the president's $8 trillion figure minimizes the problem. Recent CBO data indicate a 10-year baseline deficit closer to $13 trillion if Washington maintains today's tax-and-spend policieswhereby discretionary spending grows with the economy, war spending winds down, ObamaCare is implemented, and Congress extends all the Bush tax cuts, the Alternative Minimum Tax (AMT) patch, and the Medicare "doc fix" (i.e., no reimbursement cuts).
Under this realistic baseline, the 10-year cost of extending the Bush tax cuts ($3.2 trillion), the Medicare drug entitlement ($1 trillion), and Iraq and Afghanistan spending ($515 billion) add up to $4.7 trillion. That's approximately one-third of the $13 trillion in baseline deficitsfar from the majority the president claims.
Third and most importantly, the White House methodology is arbitrary. With Washington set to tax $33 trillion and spend $46 trillion over the next decade, how does one determine which policies "caused" the $13 trillion deficit? Mr. Obama could have just as easily singled out Social Security ($9.2 trillion over 10 years), antipoverty programs ($7 trillion), other Medicare spending ($5.4 trillion), net interest on the debt ($6.1 trillion), or nondefense discretionary spending ($7.5 trillion).
