Friday, May 9, 2008

Slippery Numbers

Andrew Biggs tries his best to mislead his readers on the Wall Street Journal op-ed page this morning (via Mankiw):

If the tax cuts expire, income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today – an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%. Believe it or not, income taxes will rise even if the tax cuts remain in place, because the revenue-increasing effects of bracket creep more than offset the lower rates. With the lower rates, total income-tax revenues will increase to 9.3% of GDP by 2018. This level is 7% higher than today, and 13% above the 1957-2007 average.
For the first 3 sentences, Biggs (correctly) discusses income tax revenues in terms of percentage-of-GDP. When you talk in terms of percentage-of-GDP, small changes in percent represent big differences, since we have a GDP of over $13 trillion. So in the last sentence Biggs quietly switches to income tax revenue level, so he can use bigger -- and more impressive -- numbers. Using Biggs' own numbers, income tax revenues are currently 8.7% of GDP. If we extend the Bush tax cuts, income tax revenues will be 9.3% of GDP. If the Bush tax cuts expire, income tax revenues will be 10.8% of GDP. Thus, if we extend the Bush tax cuts, income tax revenues will increase 0.6% (from 8.7% to 9.3%). But because a 0.6% increase won't impress many people, Biggs says that it's a 7% higher level than today (since 0.6 is roughly 7% of 8.7). Wow, our budget problems will solve themselves, even if we extend the Bush tax cuts! We can have our cake and eat it too! In reality, however, the CBO projects that we'll be running a $450 billion budget deficit in 2010. Using Biggs' own numbers again, extending the Bush tax cuts results in $83 billion more in annual income tax revenues. Letting the Bush tax cuts expire results in $291 billion more in annual income tax revenues. So the difference between extending the Bush tax cuts and letting them expire is $208 billion a year. When we're running a $450 billion budget deficit, that's no small matter.

3 comments:

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