The Congressional Budget Office released a report that gave a grim outlook for the U.S. economy.  The CBO predicts a 0.5% decline in real GDP between the fourth quarter of 2012 and 2013 if the Bush Tax Cuts are allowed to expire and scheduled spending cuts are made.

The CBO also predicts unemployment to rise to 9% for the second half of 2013 under the same scenario. 

Although these circumstances could prove hazardous for the U.S. economy in 2013, the outlook for the deficit, according to the CBO, would improve significantly.  If tax increases are made, the deficit would be expected to shrink to about $641 billion.

One of the problems with the CBO report is the correlation made between tax increases and a decreasing deficit.  The CBO report fails to acknowledge the largely positive affect of the Bush Tax Cuts on the deficit.

Below is a table that shows tax revenue from the end of the Clinton Administration to 2011.  As shown in the table, there is a steady increase in tax revenue after the Bush tax cuts in 2003.  Tax revenue eventually peaked in 2007, then declined in 2008, and dropped drastically in 2009 as a result of the recession. 

People often mistake the large deficits under the Bush administration as being proof that tax cuts for the so-called “wealthy” inevitably lead to growing deficits.   As illustrated in the table below, however, tax cuts can have a positive effect on tax revenue.  

The real issue in regards to decreasing deficits is lowering spending, not tax hikes. 

Year

Tax Revenues(in Millions)

Expenditures(in Millions)

Surplus/Deficit(in Millions)

2000

$2,026.2

$1,789.0

+$236.2

       

2001

$1,991.1

$1,862.9

+$128.2

2002

$1,853.1

$2,010.9

-$157.8

2003

$1,782.3

$2,159.9

-$377.6

2004

$1,880.1

$2,252.9

-$412.7

2005

$2,153.6

$2,472.0

-$318.3

2006

$2,406.9

$2,655.1

-$248.2

2007

$2,568.0

$2,728.7

-$160.7

2008

$2,524.0

$2,982.5

-$458.6

       

2009

$2,105.0

$3,517.7

-$1,412.7

2010

$2,162.7

$3,456.2

-$1,293.5

2011 (estimated)

$2,173.7

$3,818.8

-$1,645.1