May 12, 2006 4:58PM

Tax Cut Facts

Congress has just passed a $70 billion tax cut, which extends the Bush dividend and capital gains reductions until 2010. The legislation also provides many taxpayers a further year of relief from the dreaded Alternative Minimum Tax.

Another huge tax cut, right? The Washington Post on May 11 editorialized that the bill would blow “a hole in the federal budget.”

Actually, this tax cut just extends prior cuts and has only a tiny impact on the budget. This bill: 

  • reduces federal revenues over the next five years by just 0.5 percent.
  • represents a small fraction of the budget impact of recent spending increases. This tax cut bill is $70 billion over five years, or just $14 billion per year. Compare that to the increase in total federal spending this year of about $240 billion or more.

Note that the $70 billion estimate is an official “static” score. In reality, investor tax cuts don’t lose the government that much money because of dynamic feedback effects. As an illustration, consider the capital gains tax cuts of 2003. In 2002, the government received $58 billion in capital gains tax receipts. Congress then cut the capital gains tax rate from 20% to 15%. The result? Annual capital gains realizations have almost doubled and capital gains tax receipts have increased substantially—to about $81 billion by 2006. (See Congressional Budget Office, Budget Outlook, January 2006, p. 92).