JCT, CBO, Fed Agree:  Tax Cuts Don't "Pay For" Themselves, Could Hurt Economy 
By Jeff Lemieux
Revised July 1, 2003 in title and subhead to reflect that fact that the title at first publication, on May 15, 2003, incorrectly implied that these agencies agreed that any tax cut not "paid for" would hurt the economy.

The Joint Committee on Taxation (JCT), Congressional Budget Office (CBO) and Federal Reserve have all published recent studies debunking some of the claims of most zealous tax cut proponents.

As a Washington Post editorial points out this morning, the Joint Committee on Taxation produced an obscure, but revealing analysis of the House-passed tax cut bill last week.  The analysis is not available on JCT's website, but can be found in the Congressional Record (link below).  By JCT's estimates, the economic impact of the tax cut is roughly neutral, because positive economic incentives in the tax bill are nullified by higher interest rates over time.

When the Congressional Budget Office (CBO) produced a similar economic report in April, many tax cut proponents said the results could be misinterpreted because CBO estimated the economic impact of the whole President's budget, not the tax cut in isolation.  However, the JCT analysis produced a similar conclusion without considering the spending increases in the President's budget.

Finally, the Federal Reserve has also produced a recent study that debunks claims of tax cut proponents that tax cuts that aren't matched by spending cuts will not boost future interest rates.  The study estimates that a one percentage point change in CBO or OMB projections the future deficit as a percent of GDP boosts interest rates by .25 percentage points.  Higher interest rates, in turn, will reduce investment and economic growth.  

Links:
Joint Committee on Taxation Macroeconomic Analysis of H.R. 2, The Jobs and Growth Reconciliation Tax Act of 2003 (as printed in the Congressional Record, May 8 2003)

Congressional Budget Office An Analysis of the President's Budgetary Proposals for Fiscal Year 2004 (March 2003, see subsection:  The Potential Macroeconomic Effects of the President's Budgetary Proposals)

Federal Reserve Board New Evidence on the Interest Rate Effects of Budget Deficits and Debt (by Thomas Laubach, Finance and Economics Discussion Series, March 2003)

Washington Post Editorial What Jobs?  What Growth?  (May 14, 2003)