Bernanke on Tax Cuts

Ben Bernanke weighed in this week on tax cuts in a letter to Democratic Congressman Brad Sherman. While the entire letter was not released, some news outlets seem to be trumpeting a few quotes as contradicting Bush Administration positions. According to the Boston Globe:

''Because they increase economic activity, cuts in marginal tax rates typically lead to revenue losses that are smaller than implied by so-called static analyses, which hold economic activity constant," Bernanke wrote April 18 to Representative Brad Sherman, a California Democrat. ''However, under normal conditions, tax cuts do not wholly pay for themselves."

''The economic literature supports the idea that work effort, saving, and investment respond to tax incentives, but the sizes of the responses are in some dispute," Bernanke wrote.

To me, this is vindication for Congressional budgeters and the Administration, who can now use dynamic analysis in CBO forecasts to prevent anti-tax cutters from claiming the "tax cuts cost us $_ billion without factoring in behavioral changes that the cuts spur. Otherwise, how can anyone explain the 14% increase in tax receipts in 2005? Do naysayers think receipts would have actually been up 25-30% without the Bush tax cuts? That's obviously ridiculous and they have no answer to the empirical evidence of higher receipts after tax cuts.

Additionally, Bernanke does not address precisely how well or poorly an economy would do without well-timed tax cuts. Thus, his statement that "under normal conditions, tax cuts do not wholly pay for themselves" does not imply anything about where receipts would actually be today. We also don't know whether the popping of the Internet bubble and 9/11 are part of "normal conditions."

Still, some bloggers seem to think this contradicts Bush Administration claims. PoliWatch seems to think it does.