GDP Help - Bush Tax Cut Puny Compared to Reagan's

America's Gross Domestic Product, and how it has grown over the last 22 years, is the key factor when comparing President Bush's tax relief package with Ronald Reagan's. After all, if you owed $5 as ten-year-old, it's hardly equal to owing $5 as a 32-year-old - even with inflation. Likewise, our GDP has grown - and will be larger still in 10 years. The mistake people make is judging this ten-year tax cut based on today's GDP.

You should no more do that than you would plan to make the same income in 10 years than you do today, with no growth and no raises. The deficit as a percentage of GDP is tiny; you get out of deficits (pay your debts) through growing your income and reducing spending. (Note: a multi-year plan passed by one Congress has no binding power on future congresses.) An e-mailer sent me an example from his MBA study days illustrating how a GDP of $9 trillion can be predicted, counting on a moderate growth rate of 4%. Note that GDP for 2002 totaled $10.4 trillion according to the Department of Commerce, and based on the first quarter of 2003, we're on target for $10.7 trillion this year. The key point is, consider $350 billion in tax relief as a percentage of 10 years worth of $10.7 trillion GDP. That's 0.33% - even without any economic growth at all!...

I studied to get a C in econ 101 and henceforth was relieved of my "obligations" in that area. It wasn't of interest and it "never stuck". Here I am trying to understand what I couldn't back then, and am looking for help.

I couldn’t find the MBA’s tax cut equations which were mentioned yesterday when I listened to the entire show last night.

I divided $350 billion by $135 trillion and came up with 0.0026. That's equal to 26/10,000 of $135 trillion.

How do I get 26/10000 of 1% here let alone 1% in any of the other proposed cuts?

Then I have arguments about this area from the leftist econos which again I'm simply trying to understand;

Once again, it's an embarassment to hear Rush attempt to do math. First, Rush calculates the 10-year total GDP of $135 trillion by taking a GDP of $9 trillion, multiplying it by 10, and increasing it by 50% to estimate the total increase from a 4% annual growth rate. The problem is that this formula is wrong. If you calculate the total with a spreadsheet, you'll find that the actual total is about $108 trillion. Now, I did notice that the 2004 Budget gave the GDP in 2002 as $10.3366 trillion. But, even using this number, the total GDP comes out to be about $124 trillion.
Finally, it's erroneous to even compare the size of the tax cut to the GDP. The fact is, the government will never be able to access all of the GDP. It can only access that part that it obtains through taxes. Hence, the tax cut should be compared to total federal receipts, not GDP. For the past several decades, total federal receipts have been about 20 percent of GDP.

In 1 it seems as if we're not being given the opportunity to allow the GDP to grow each year, but base it on today.

In 2 my guess is that there is significantly less GDP with higher taxes, but as I said, this ain't my area. I'm looking for some better qualified to express opinions.

I divided $350 billion by $135 trillion and came up with 0.0026. That's equal to 26/10,000 of $135 trillion. How do I get 26/10000 of 1% here let alone 1% in any of the other proposed cuts?

Why did you use 135 trillion? The example from Rush said GDP is 10.7 trillion this year and he then said that if you take the 10-year tax cut as a percentage of 10 years of current level GDP (not accounting for growth) you get 0.33%. So using 10 years of the current 10.7 trillion GDP you would get 107 trillion. If you divide 350 billion by 107 trillion, you get 0.00327, or rounded to 0.0033, which is 0.33%.

Regarding the arguments, let’s consider them one at a time: The first argument ridicules Rush for his math, but then makes completely irrelevant points. If you start with 10.7 Trillion as GDP for 2003 and then assume 4% growth for ten years, the total 10-yr GDP figure is approximately $128.5 trillion, which then makes a 350 billion tax cut even smaller than 0.33%, but Rush ignored growth just to prove the point of how miniscule the tax cut is.

The second argument (that it is erroneous to measure the tax cut as a percentage of GDP) is simply wrong on its face, and any “economist” that offers that argument is demonstrating dishonesty or ignorance. The only way to measure tax cuts or any other fiscal policy variable over time is as a percentage of GDP since GDP is the measure of economic output. If tax revenues are assumed to remain relatively constant in relation to GDP (i.e. tax revenues increase when the economy increases and decrease when the economy declines), then measuring the tax cut as a percentage of tax revenue will give essentially the same result as measuring it as a percentage of GDP, but on a smaller scale. However, to really accurately measure any fiscal policy variable, whether it is spending items or tax items, it should be considered as a percentage of the economy’s activity – GDP.

I got my MBA with 10 A's and 2 B's. There is confusion here, but this isn't that hard. Here are my spreadsheet results. I compute a 4% increase by multiplying each year by 1.04.

Year Starting values:1  2               3
2002	10.3366	        9          	10.4	
2003	10.750064	9.36	        10.816	
2004	11.18006656	9.7344	        11.24864	
2005	11.62726922	10.123776	11.6985856	
2006	12.09235999	10.52872704	12.16652902	
2007	12.57605439	10.94987612	12.65319018	
2008	13.07909657	11.38787117	13.15931779	
2009	13.60226043	11.84338601	13.6856905	
2010	14.14635085	12.31712145	14.23311812	
2011	14.71220488	12.80980631	14.80244285	
2012	15.30069308	13.32219856	15.39454056	
       139.40302       121.3771627     140.2580546	Total

350 Billion/10.7 Trillion * 10 =.327%  That's what Rush cited, taking 10.7 T over 10 years.
350 Billion/135 Trillion=.26% This is what the spreesheet computed,based upon 4% growth.

The first argument deals with Rush's calculations for the GDP over 10 years. Rush is closer than the economist, as you can see from above. A better argument is that 4% is not a modest assumption, but a high one. In the '90's, we hit 4% only one or two years. Most of the time we were between 3 and 4% growth, which is still quite good.

In any case, all this future projections are estimates, in both Rush's case and the economist's case. The rough way of estimating is quite good enough, given the uncertainty over 10 years.

The second argument deals with focus: are we looking at the effect of the tax cut on the economy or upon the federal government? I prefer the former, as did Rush. The economist prefers the latter. A good question is why focus on the effect of the federal government, when what we care about is the entire economy.

But, if you compute the size of the tax cut based on federal tax receipts, the economist's way is correct--so merely multiply the .33% by 5 and get 1.66%. Not a big deal. President Bush asked for a 700 B tax cut, which would be 3.33%--still small potatoes. Which is Rush's point.

The link did not work for me, but let me take a crack at it with what is posted here. The first leftist econo point depends on whether you use the 2002 GDP as year 1 of 10 or base year 0. He is right that increasing it by 50% is not technically correct, it gets you real close...with 2002 as year 0, I came up with $139.4 trillion at 4% growth. Regardless, these are all estimates, if he was legitimate he would have disputed the 4% number (it is arguably a little high) rather than the exact methods used to calculate based on what amounts to a rough guess. Rush's point is that the economy will be way bigger...and it will. So the larger future tax cuts (remember how people keep saying the big cuts are in the future?) will be spread over a much larger economy than todays.

The tax cuts over the decade($350 B/$135 T) is about 0.26% of the economy over the decade. One quarter of one percent. To start with his federal government takes roughly 20% estimate, that would mean over the next decade the federal government would "only" take 19.75% instead of 20%.

And it is not "erroneous" to compare the tax cut to the GNP. Taxes come out of our economy, so it is relevent. And his "for the last several decades federal receipts have "been about" 20%" is misleading because the percentage of the economy the federal government takes in taxes has been steadily creeping up. It may have averaged this over the last "several decades" but it is certainly much higher now. In case he hasn't noticed, government has been growing, and at a pretty good clip. (faster than the economy)

The essence of his argument is that one quarter of one percent difference does not sound big enough to set off adequate doom and gloom, so rather than 0.26% of the economy, he wants to say (0.26%/20%) or 1.3% cut in federal tax receipts. Same numerator, he wants to compare it to a smaller denominator to make the cuts sound larger.

I'm not sure if that cleared anything up or not, but I hope it helped.

It is truly an embarassment to hear Rush attempt to do math. His latest attempt can be heard at the first audio link at the following URL:

http://www.rushlimbaugh.com/home/daily/site_042803/content/institute.guest.html

First, Rush calculates the 10-year total GDP of $135 trillion by taking a GDP of $9 trillion, multiplying it by 10, and increasing it by 50% to estimate the total increase from a 4% annual growth rate. The problem is that this formula is wrong. If you calculate the total with a spreadsheet, you'll find that the actual total is about $108 trillion. Now, I did notice that the 2004 Budget gave the GDP in 2002 as $10.3366 trillion. But, even using this number, the total GDP comes out to be about $124 trillion.

In any case, Rush then calculates the various tax cut figures as a percentage of this $135 trillion figure. He comes up with the following:

$350 billion = 26/10000 of 1% of 10-year total GDP of $135 trillion
$550 billion = 41/10000 of 1% of 10-year total GDP of $135 trillion
$726 billion = 54/10000 of 1% of 10-year total GDP of $135 trillion

Now, if I take $350 billion and divide it by $135 trillion (or $135,000 billion), I come up with 0.0026. That's equal to 26/10000. Yet Rush is saying that it's 26/10000 OF ONE PERCENT. Hence, he is claiming that the tax cut is 1/100th or one percent of it's acutual size. That's a pretty big error, even for Rush!

Finally, it's erroneous to even compare the size of the tax cut to the GDP. The fact is, the government will never be able to access all of the GDP. It can only access that part that it obtains through taxes. Hence, the tax cut should be compared to total federal receipts, not GDP. For the past several decades, total federal receipts have been about 20 percent of GDP.

It will be interesting to see if Rush issues a retraction of his horrendous math errors. He has essentially lied to millions of his listeners, by a factor of over a hundred. The fact that the errors are so heavily in his favor make a retraction essential to his credibility, in my opinion.

I got my MBA with 10 A's and 2 B's. There is confusion here, but this isn't that hard. Here are my spreadsheet results. I compute a 4% increase by multiplying each year by 1.04.
Year Starting values:1 2 3 2002 10.3366 9 10.4 2003 10.750064 9.36 10.816 2004 11.18006656 9.7344 11.24864 2005 11.62726922 10.123776 11.6985856 2006 12.09235999 10.52872704 12.16652902 2007 12.57605439 10.94987612 12.65319018 2008 13.07909657 11.38787117 13.15931779 2009 13.60226043 11.84338601 13.6856905 2010 14.14635085 12.31712145 14.23311812 2011 14.71220488 12.80980631 14.80244285 2012 15.30069308 13.32219856 15.39454056 139.40302 121.3771627 140.2580546 Total
350 Billion/10.7 Trillion * 10 =.327% That's what Rush cited, taking 10.7 T over 10 years.
350 Billion/135 Trillion=.26% This is what the spreesheet computed,based upon 4% growth.

The problem is, you've included eleven years in each column. The tax cuts are calculated for the ten years from 2004 to 2013. So, if you delete the eleventh year (2012) from the columns, the totals come out as 124.1023, 108.0550, and 124.8635. This is where I came up with the value of $108 trillion.

In any case, I think there is confusion over the fact that Rush gave one set of figures on his radio show (and in the audio link) and a different set in the article that accompanies the audio link. Hence, I'll transcribe Rush's calculations as given in the audio link below (perhaps someone can check my accuracy). To set it up, he is describing an email that he received from someone in Sioux Fall, South Dakota:

And he says "Rush, it may be of interest to point out the following from my basic economics class in my old college days on the way to earning my MBA. To get the U.S. GDP for ten years, ten years from now, multiply the existing GDP by ten and then add about 50 percent for total ten-year growth at about four percent. This includes increases from the previous years and four percent, incidently, is only moderate growth. The current GDP of this country is approximately 9 trillion dollars. The next ten years' total GDP will be about 90 trillion dollars. If you add 50 percent for growth, then the total will be 135 trillion dollars, meaning the total GDP.

Step three. Take the proposed ten-year tax cuts and their percentages of that total, percentages of 135 trillion. 350 billion dollar tax cut equals 26 ten-thousandths of one percent. A 350 billion dollar tax cut equals 26 ten-thousandths of one percent of our GDP. A 550 billion dollar tax cut equals 41 ten-thousandths of one percen of GDP. A 726 billion dollar tax cut, the amount the President originally wanted - 54 ten-thousandths of one pecent of the ten-year GDP.

Source: Rush Limbaugh radio show, April 28, 2003, audio link at http://mfile.akamai.com/5020/wma/rushlimb.download.akamai.com/5020/clips/03/04/042803_10_gdp.asx

As Rush says, he got the $135 trillion figure by multiplying $9 trillion by 10 and then increasing it by 50%. This is a mistake. Increasing a year's GDP by 50% does give a good estimate of the GDP in ten years, assuming 4% growth. As the table above shows, if you start with $9 trillion, the GDP in ten years is $13.32219856 trillion, very close to $13.5 trillion ($9 trillion increased by 50%). Hence, Rush is effectively taking the GDP in ten years (one year past the end of the time span in question) and multiplying it by ten to get the ten-year total.

Of course, starting with $9 trillion to begin with is an error. The GDP was closest to $9 trillion (at 9.1243 trillion) back in 1999. In addition, Rush accounts for the growth in the GDP but does not account for the growth of the additional debt incurred by the tax cut (due to interest charges). Of course, the biggest error is being off by a factor of one hundred in describing the 350 billion dollar tax cut as equal to 26 ten-thousandths of one percent.

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