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A Project of The Annenberg Public Policy Center

Supply-side Spin

Sen. John McCain has said President Bush's tax cuts have increased federal revenues. But revenues would have been even higher without them.


Republican presidential candidate Sen. John McCain has said that the major tax cuts passed in 2001 and 2003 have “increased revenues.” He also said that tax cuts in general increase revenues. That’s highly misleading.

In fact, the last half-dozen years have shown us that we can’t have both lower taxes and fatter government coffers. The Congressional Budget Office, the Treasury Department, the Joint Committee on Taxation, the White House’s Council of Economic Advisers and a former Bush administration economist all say that tax cuts lead to revenues that are lower than they otherwise would have been – even if they spur some economic growth. And federal revenues actually declined at the beginning of this decade before rebounding. The growth in the past three years that McCain refers to brings revenues back in line with the 40-year historical average as a percentage of gross domestic product.

It’s unclear how much of the growth can be attributed to the tax cuts. Capital gains tax receipts did increase greatly from 2003 to 2006, but the CBO estimates that they will level off and decrease in the next few years. The growth overwhelmingly resulted from a sharp rise in corporate tax receipts, the cause of which is a topic of debate.


At the May 15 Republican presidential debate, Arizona Sen. John McCain was asked about his opposition to President’s Bush 2001 tax cuts. (Also, the senator voted against the 2003 tax cuts.)

Fox News Channel’s Wendell Goler: Sen. McCain, you opposed President Bush’s 2001 tax cuts. Now you say you were wrong. How can you convince Republican voters you will push a Democratic Congress hard enough to make those tax cuts permanent, sir?

Sen. McCain: Well, first of all, I didn’t say that I was wrong. I said that the reason why I opposed those tax cuts was because we didn’t rein in spending.
And the fact is the tax cuts have dramatically increased revenues.

Earlier this year in a National Review interview published March 6, McCain said tax cuts in general created revenue gains:

National Review’s Ramesh Ponnuru: If you could get the Democrats to agree, or at least to come to the table on entitlements or on tax simplification, are those circumstances under which you’d be willing to accept a tax increase?

Sen. McCain: No; no.

Ponnuru: No circumstances?

Sen. McCain: No. None. None. Tax cuts, starting with Kennedy, as we all know, increase revenues. So what’s the argument for increasing taxes? If you get the opposite effect out of tax cuts?

Other Republicans and administration officials, including the president, have made similar statements about the power of the 2001 and 2003 tax cuts. But McCain and his colleagues are not accounting for the decrease in revenue that accompanied the cuts.

Washington Post last October. Viard, who worked in the Treasury Department’s Office of Tax Analysis and the White House’s Council of Economic Advisers under President Bush, told FactCheck.org that “nobody can absolutely prove that.” Proof would require time travel and a reversal of tax policy. “But among economists, there’s no dispute.”

Tax cuts can be a sound economic move that spurs growth, says Viard. “But it doesn’t mean that [the cuts] gained revenue.”

If the government had reined in spending – as McCain wanted – the senator might have more to brag about. Viard says economists would expect a boost to the economy if tax relief had been matched by spending cuts. When the cuts are deficit-financed (as these are), it’s still possible to have positive growth, he continues, but that’s a different matter from saying there’s a net increase.

“I found Sen. McCain’s statement rather disappointing on this matter,” he says, referring to the GOP debate.

Federal agencies have published similar statements regarding the effect of tax cuts on federal receipts. From the Congressional Budget Office’s 2007 Budget Outlook: “The expiration of tax provisions as scheduled has a substantial impact on CBO’s projections, especially beyond 2010 when a number of revenue-reducing tax provisions enacted in the past several years are slated to expire,” the report says. “Almost all of the expiring provisions reduce revenues.”

Estimates for the effect of the Jobs and Growth Tax Relief Reconciliation Act of 2003 were that it would reduce otherwise projected revenues by 148.7 billion in 2004, 82.2 billion in 2005 and 20.7 billion in 2006. The JCT makes its comparisons against the Congressional Budget Office’s receipts baselines.

Also, Rob Portman, director of the Office of Management and Budget, and Ed Lazear, chairman of the Council of Economic Advisers, told journalists at the Washington Times last October that the tax cuts prompted economic and stock market growth. But, the paper reported, “they conceded that the tax cuts…cut deeply into government revenue.”

Revenue Ups and Downs

When we contacted the McCain campaign, aide Matt David responded in an e-mail that Sen. McCain was referring to the increase in federal revenues between 2001 and 2006. Government receipts rose 20.9 percent between 2001 and 2006, and they were up 35 percent between 2003 and 2006.

When we asked for McCain’s explanation of how the tax cuts have increased revenue, his campaign replied:

McCain aide: “The 2001 and 2003 tax cuts contributed to the economic growth, rise in profitability, and shifts in the form of compensation that have produced strong receipts growth over the past several years. Good tax policy contributes to more rapid growth in receipts.”

We’re not quibbling with most of that. A Treasury Department analysis found that the tax cuts prompted the creation of jobs and increased the gross domestic product. If McCain had said the tax cuts contributed to economic growth, he would have been correct. McCain’s last sentence may be true, too, but not if the phrase “good tax policy” is equated with the ’01 and ’03 tax cuts.

Federal revenue normally increases every year. In fact, revenues have declined in only five years since 1962. The 35 percent growth between 2003 and 2006 is significant – the last major growth in revenue was between 1997 and 2000, when the economy was booming and federal receipts rose 28.2 percent. But the recent three-year period also comes after three years of decreases, a drop Viard attributes to the 2001 tax cuts and the start of a recession that same year.

Source: Congressional Budget Office, “Historical Budget Data

The Office of Management and Budget describes the rebound in the past few years as a return to the historical average. As a percentage of GDP, federal receipts are now 18.4 percent of GDP (in line with the 40-year historical average of 18.3 percent).

McCain also told the Economic Club of Memphis on April 16: “If the federal government can’t be funded with current revenues, which are growing at historic rates, then the government is too big and is growing too fast.”

The percentage growth since 2003 may be historic, but the government’s coffers are no more flush with funds as a percentage of the economy than they have been on average for 40 years. In our judgment, McCain’s statements give a false impression about the impact of the tax cuts.

The Source of the Growth

But can the increase in receipts over the last three years be attributed to the tax cuts? Where has the growth in revenue come from? That is a tough question for economists to answer definitively, but the bulk of the growth in federal receipts has been in corporate tax revenue.

In 2006, according to the CBO, individual income tax revenue was 1,043.9 billion, an increase of 5 percent since 2001. Corporate tax revenue was 353.9 billion in 2006, a 134 percent rise from 2001. That’s a dramatic increase.

“It really is astonishing,” Viard says of those numbers. But he can’t point to major corporate tax cuts that would have spurred the growth. Corporate profits are doing very well and the economy is growing, but “I don’t know that there’s a single, clear cut reason for that.”

A May 2006 report by the Federal Reserve Board did not find that the 2003 dividend tax cut had a major impact on stock prices.

Federal Reserve Board authors: “We do not find any imprint of the dividend tax cut news on the value of the aggregate U.S. stock market. On the other hand, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows, suggesting that the tax cut did induce asset reallocation within equity portfolios.”

That contradicts President Bush’s pronouncements. In May 2006, when the president signed an extension of tax relief legislation, he said: “The cuts on dividends and capital gains are reaching families and businesses alike…. By cutting the taxes on dividends and capital gains, we helped add about $4 trillion in new wealth to the stock market.”

The CBO analyzed data to uncover the causes of revenue growth since 2003 in response to a request from Sen. Kent Conrad, chair of the Senate budget committee. In a letter to Conrad, CBO Director Peter R. Orszag says that overall receipts increased by 1.9 percentage points as a share of GDP and that the increase “disproportionately” comes from a rise in corporate income tax revenues.

Orszag attributes two-thirds of the bump in corporate taxes to an increase in corporate profits. The rest he pins to tax policy. For instance, when provisions allowing partial expensing of investment in equipment expired, tax revenue increased. In other words, revenue declined when the provisions were enacted and bumped up again when they expired.

Orszag says there was growth in capital gains realizations in individual tax receipts, but measures such as lower rates on dividends and an increase in the child tax credit, as well as a drop in job wages, caused a reduction in revenues. A CBO chart in Orszag’s letter shows that legislation (not counting an impact on capital gains) had a total negative effect on revenue growth.

The impact of the tax cuts on economic growth is a matter of debate among economists. We’re not voicing a view on whether the tax cuts should have been enacted; that, too, is a separate discussion. But it is clear they did not “increase revenues.”

Supporting Documents

View: Joint Committee on Taxation chartView: CBO chart on sources of growth in tax revenue


United States Congressional Budget Office. “The Budget and Economic Outlook: Fiscal years 2008 to 2017” Jan. 2007.

United States Council of Economic Advisers. “Economic Report of the President.” U.S. Government Printing Office. Feb. 2003.

Ponnuru, Ramesh. “The Full McCain.” National Review Online. 5 March 2007.

Montgomery, Lori. “Lower Deficit Sparks Debate Over Tax Cuts’ Role.” Washington Post. 17 Oct. 2006, D01.

United States Joint Committee on Taxation. “Estimated Budget Effects of the Conference Agreement for H.R. 1836” JCX-51-01. 26 May 2001.

United States Joint Committee on Taxation. “Estimated Budget Effects of the Conference Agreement for H.R. 2 The ‘Jobs and Growth Tax Relief Reconciliation Act of 2003’ ” JCX-55-03. 22 May 2003.

United States Joint Committee on Taxation. “Exploring Issues in the Development of Macroeconomic Models for Use in Tax Policy Analysis” JCX-19-06. 16 June 2006.

Hill, Patrice. “House or Senate shake-up likely to end tax cuts.” Washington Times 5 Oct. 2006.

United States Congressional Research Service. “The Budget for Fiscal Year 2008.” 12 March 2007.

United States Congressional Budget Office. “Historical Budget Data” 2007.

United States Department of the Treasury, Office of Tax Analysis. “A Dynamic Analysis of Permanent Extension of the President’s Tax Relief.” 25 July 2006.

United States Office of Management and Budget. “Budget of the U.S. Government Fiscal Year 2008.” Presentation 5 Feb. 2007.

Amromini, Gene; Harrison, Paul; and Sharpe, Steven. “How Did the 2003 Dividend Tax Cut Affect Stock Prices?” United States Federal Reserve Board, Divisions of Research & Statistics and Monetary Affairs. 29 May 2006.

United States Congressional Budget Office. Letter from Director Peter R. Orszag to Sen. Kent Conrad. 18 May 2007.