* Interest payments declined as a share of GDP, despite the increase in deficits, because of the drop in interest rates. Tax and Spending as a Share of the Economy: Change From 2000 to 2005 As Table 1 shows, the increase in program spending is less than two-thirds the decline in revenues. This decline in revenues, equal to 4.0 percent of GDP, reflects the effects of the tax cuts, as well as an erosion in revenues caused by the bursting of the stock market bubble and a less robust economy overall. CBO projects that in 2005, revenues will amount to just 16.8 percent of GDP. In 2000, federal revenues equaled 20.9 percent of the Gross Domestic Product, the basic measure of the size of the economy. It shows that while there has been growth in spending as a share of the economy, the lion’s share of the swing from surpluses to deficits stems from a major drop in revenues. Such an analysis looks at all changes in revenues and spending, not just those that resulted from legislation. Īnother way to evaluate the recent trends that have caused the shift from sizeable surpluses to large deficits is to look at how spending and revenues each have changed as a share of the economy over the 2000-2005 period. Stated simply, the tax cuts are more likely to reduce long-term growth than to increase it. Estate tax repeal also does not take effect until 2010.Ī growing number of studies from highly respected institutions and economists have concluded that the negative effect on long-term growth of the increased deficits that the tax cuts are generating is likely to cancel out - and quite possibly to outweigh - any positive effects on long-term growth from reductions in marginal tax rates and other tax incentives in the 20 tax-cut packages. The repeal of the “personal exemption phase-out” for high-income taxpayers, as well as repeal of the limitation on itemized deductions for high-income taxpayers, do not start to phase in until 2006 and do not take full effect until 2010. Indeed, some of the tax cuts enacted in 2001 that benefit only high-income households have not even started to take effect yet. But the downturn is behind us, and the cost of the tax cuts is scheduled to increase in the years ahead. The Administration has repeatedly defended its tax cuts as a needed stimulus during the recent economic downturn.
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