[I]nstead of costing the government $27 billion in revenues, the tax cuts actually earned the government $26 billion extra.Unfortunately, while the numbers Don refers to are correct, his analysis has some serious problems.
CBO's estimate of the "cost" of the tax cut was virtually 180 degrees wrong. The Laffer curve lives!
Don't get me wrong, I'd love it if Don's analysis was correct. I'm all for low tax rates because in the long run, due to the increased economic growth that coincides with lower taxes, everybody will be better off, rich and poor alike. Even the government will have more to spend in absolute terms.
There are several things in Don's analysis that have problems, but in this post I will focus on the biggest, yet simplest, problem: you can't compare predicted revenues with later actual revenues unless you have a high degree of confidence that the predictions are accurate. That simply isn't true for CBO predictions of revenues from taxes on capital gains.
First of all, the CBO knows that it has a terrible record predicting such revenues. On page 56 of "THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2001-2010" the CBO states:
Capital gains realizations, which are often considered relevant to the accuracy of forecasts, are notoriously difficult to predict. They constitute a relatively small percentage of individual tax receipts, however, and errors in forecasting them are unlikely to play a large role in errors in revenue forecasts.In other words, they know that they're very bad at predicting capital gains revenues and they're not going to try to improve. And true to form, the CBO's predictions have been truly terrible. As and example, the following table shows the CBO's prediction of capital gains liabilities for 2001 through 2005 and the actual revenues:
Year Predicted ActualThe estimate for the predicted revenues was reported at the beginning of the year. The actual revenues were reported two years after that to allow the dust to settle, except for 2005 which was reported at the beginning of 2006. As you can see, being off by a factor of two is par for the course.
2001: 129 61
2002: 95 47
2003: 54 47
2004: 46 71
2005: 58 81
Therefore, you can assign very little meaning to the fact that revenues after the tax rate cuts were higher than predicted by the CBO.