Economists Agree: Tax Cuts Cost Revenue

Economists say a combination of tax cuts and more spending are needed to stimulate the weak economy.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

There's an old joke that if you laid all the economists in the world end to end, they wouldn't reach a conclusion. Well, not quite. A panel of prominent economists recently came to a decisive conclusion: Despite a widely held notion to the contrary in powerful circles, tax cuts cost revenue. 

First, let's be clear that we're not talking about a biased group of economists. The IGM economic experts panel, run by the Initiative on Global Markets at the University of Chicago's Booth School of Business, was created to explore the extent to which economists agree or disagree on major public policy issues, and it includes Democrats, Republicans, and independents as well as older and younger scholars. The panel is surveyed regularly, each time on a different topic.

When asked recently about the proposition, "A cut in federal income tax rates in the U.S. right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut," none of the panel's 40 economists agreed. When responses were weighted by the confidence respondents expressed in their answers, 96 percent disagreed and 4 percent were uncertain.

[See a collection of political cartoons on the economy.]

The economists were asked a second question, about whether cutting income taxes right now would lead to higher gross domestic product in five years. Here, 43 percent agreed it would, 48 percent were uncertain, and 9 percent disagreed (on a confidence-weighted basis). 

So, putting these results together with those I reported last week on economic stimulus from the same panel, we can conclude that there is widespread agreement among expert economists that, in a weak economy, a stimulus package of both tax cuts and more spending will increase growth and reduce unemployment, that there is much less agreement about whether tax cuts alone will do so, and there is very strong agreement that tax cuts do not pay for themselves.

None of this suggests that economists are united in their policy recommendations. On the stimulus, for example, three fifths of the IGM panel (when responses were weighted by each expert's confidence) thought the overall benefits of the stimulus would turn out to be worth the costs, but a quarter was uncertain. On taxes, nearly half were uncertain that rate cuts would raise GDP. 

[See a collection of political cartoons on the budget and deficit.]

The panel was not asked about specific tax and spending measures. However, in its analysis of policies to boost economic growth and employment in a weak economy, the Congressional Budget Office shows that different tax and spending policies vary in how well they promote growth and employment per dollar of budgetary cost. In general, policies that put money in the pockets of people who will spend it, such as unemployment insurance and food stamps or tax cuts for low- and moderate-income households, are much more cost-effective than tax cuts for high-income taxpayers or for reducing businesses' income taxes. Government purchases of goods and services are highly effective once the spending gets into the economy.

The financial crisis and Great Recession have prompted many debates within the economics profession, and economists' policy advice is influenced by their views on the proper size and role of government and how important issues of fairness and inequality should be in designing policies. But, as the IGM surveys make clear, politicians who argue that spending increases always have to be offset but that tax cuts never do are arguing a position that flies in the face of the best economic thinking.

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