The Bush Tax Cut

The Administration often claims the tax cuts in President Bush's budget are an afterthought, merely returning government "overcharges" to the taxpayers after funding basic needs and reducing public debt. In reality, tax cuts are the budget's overriding priority. House Republicans, with the President's encouragement, have pressed ahead with the largest elements of the tax package well before the Administration figured out its budget or the Congress had passed a budget resolution.

Congressional Republicans and the President have argued that the "sputtering" economy justified such haste in pushing a huge, multi-year tax cut. However, the numbers in the President's budget do not support this. The budget calls for a cut of only $172 million in 2001. This amounts to a mere 0.002 percent of GDP, a trivial stimulus. The President's tax package is extremely back-loaded even according to his own estimates, with almost 70 percent of the revenue loss in the second five years.

Unfortunately, the estimates of the tax cuts included in the President's budget understate their real cost. The budget claims that the total revenue loss of the President's many tax cut promises does not exceed $1.6 trillion over ten years. However, Congress's official scorekeeper, the Joint Committee on Taxation (JCT), has found that the largest elements of the package cost considerably more than claimed. There may be reason to believe that the remaining elements of the President's tax package that JCT has not scored are understated as well.

The True Cost of the Bush Tax Cut

The claim in the President's budget that the proposed tax cut "accounts for only one quarter of the projected ten-year budget surplus" is mistaken, even if one takes the tax cut's understated cost estimate of $1.6 trillion at face value. In fact, the President's own numbers show that the direct revenue loss from the tax cut amounts to 29 percent of the unified surplus. If one includes the added spending on interest payments to bondholders that the tax cut will require, the figure rises to 36 percent. As a percent of the surplus available outside of Social Security and Medicare, the tax cut with debt service consumes 75 percent of the surplus.

If one uses more realistic estimates of the tax package's cost, the tax cut and associated debt service would appear to exhaust almost all of the surplus outside of Social Security and Medicare. The table below shows the effect of (1) substituting JCT's estimates for the largest components of the Bush tax package for the Administration's estimates; (2) adjusting the tax cut to prevent it from forcing an intolerable number of middle-class taxpayers to pay the alternative minimum tax; and (3) accounting for the fact that the tax cut will require higher government spending for interest on the national debt.

JCT estimates of the two House bills, H.R. 3 and H.R. 8, that embody the President's rate cuts, the increase in the child credit, and marriage penalty relief were $241 billion higher than the Administration claimed. Because these two bills consume close to $1.4 trillion, House Republicans could not pass the President's proposal to repeal the estate tax without breaching the $1.6 trillion ceiling, given that the Administration estimates its cost at $262 billion over ten years and JCT estimated the cost of immediate repeal at $662 billion over ten years. Instead, House Republicans introduced H.R. 8, which JCT estimated to cost less than the Administration proposal. The bill's unusually low cost results from it having very little relief for the first nine years, with full repeal postponed until 2011. This pushes the true cost of repeal outside the ten-year budgeting window.

The Cost of Bush Tax Cut Promises—So Far Billions of Dollars
Rate Cuts (H.R. 3)	958
Child Credit and Marriage Penalty (H.R. 6)	399
Estate Tax Repeal (H.R. 8)	193
Fix AMT Problems Caused By Bush Tax Cut	292
Charity-Related Tax Preferences	56
Permanent Extension of R&E Credit	50
Expand Education Savings Accounts	6
Health, Long-Term Care, and Miscellaneous Tax Cuts	123
Total Revenue Loss	2,077
Revenue Loss Plus Added Interest Payments to Bondholders	2,560

The table also shows the added cost of fixing the Bush tax cut's interactions with the alternative minimum tax (AMT). Under current law, the number of taxpayers subject to the AMT is projected to increase, but the Bush tax cut makes this problem much worse. If the Bush tax cut were passed as is, the number of filers subject to the AMT would rise to 36 million by 2011, including more than half of all families of four. Just to keep the Bush tax cut from increasing the number of filers subject to the AMT under current law adds $292 billion to the cost. That is, the President has promised taxpayers $292 billion in tax cuts that they will not get, and he will have to acknowledge this cost to keep his promise.

If one adds the Administration's estimates for the rest of its tax package to JCT's estimates of H.R. 3, 6, and 8, as well as the cost of fixing the AMT problems that the Bush tax cut creates, the total revenue loss from the Bush package exceeds $2 trillion. If JCT estimates for the charity-related, R&E, education, health insurance, and other proposals are also higher than the Administration's estimates, the revenue loss will be greater still.

In addition, the fact that the President's budget uses a substantial portion of the projected surplus for tax reduction rather than debt reduction means higher spending for interest payments to bondholders. This added debt service comes to almost half a trillion dollars and pushes the Bush tax cut's impact on the surplus up to almost $2.6 trillion. This comes close to exceeding CBO's estimate of the non-Social Security, non-Medicare surplus and more than exhausts the Administration's estimate of it.

Finally, there are good reasons to suspect that the total cost of tax cuts this year could swell even more. First, the budget extends for only one year several popular expiring tax credits, like the work opportunity credit and the welfare-to-work credit. Congress has always renewed these credits in the past and certainly will in the future. Since these credits will unquestionably be renewed, as well they should, the budget should include an accurate accounting of their cost. This would add perhaps another $50 billion over ten years.

One might also worry about the ability to resist pressure to add new elements to the President's tax package that raise its overall cost. Members of Congress and the business community have already called for a variety of additional tax cuts. For instance, tax cuts passed by the House last year that do not overlap with the provisions of the Bush tax cut would add hundreds of billions of dollars to the cost over ten years. In addition, a broad consortium of industries has urged that various business tax cuts including a capital gains cut, accelerated depreciation, elimination of the corporate AMT, and lower corporate tax rates be enacted once the President's package of personal tax cuts has passed.

Tax Fairness

The President continues to downplay the lopsided nature of his tax cut. The President claims that his tax cut is fair because the percentage tax reductions in his plan are largest at the bottom of the income distribution. However, that amounts to saying that a restaurant worker whose $200 income tax liability is totally eliminated gets a larger benefit than a lawyer whose $20,000 tax liability is cut in half.

In fact, the highest income taxpayers would receive the greatest tax benefits from the Bush plan by any reasonable accounting. The share of the tax cut going to the top one percent of the income distribution exceeds the share going to the bottom 80 percent. Citizens for Tax Justice (CTJ) estimates that the top one percent, with incomes averaging more than $900,000 per year, will get an average tax cut of $54,480. CTJ estimates that the top one percent receives 45 percent of the tax cut's benefits even though they pay only 21 percent of federal taxes. By contrast, the bottom 80 percent gets 28 percent of the tax cut's benefits, with an average cut of $430.

The Administration has argued that the top one percent actually receive only 22 percent of the Bush tax cut. There are two problems with this calculation. First, the estimate is based on 2006, before many of the tax cuts that benefit the very affluent are fully phased-in. Second, the estimate does not include estate tax repeal, even though it accounts for 24 percent of the cost of the Bush tax cut when fully phased-in. Career staff at the Treasury Department have a model for calculating the distributional consequences of estate tax repeal, but the Administration declines to use it.

The Administration has defended the exclusion of estate tax repeal from its distributional calculations by arguing that decedents with large estates do not get the benefits of estate tax repeal, their heirs do. And, while we may know the income and wealth of the decedent, it is difficult to assess the economic status of the heirs.

However, Treasury data show, not surprisingly, that the children of decedents with large estates tend to have high incomes. A 1998 Treasury study showed that children receiving bequests in 1981 from estates valued between $2.5 million and $10.0 million had taxable incomes averaging $123,452, while those receiving bequests from estates over $10.0 million had average taxable incomes of $271,254. In 1981, these income levels were easily within the top five percent and top one percent, respectively. Since then, the price level has doubled, and real incomes have grown as well, especially at the top. We might thus infer that heirs of large estates today have incomes two or even three times as large as they were in 1981.

The President claims that "the typical family of four will be able to keep at least $1,600 more of their own money when the plan is fully effective." However, more than 85 percent of taxpayers will get tax cuts less than that amount, and many will get nothing. For instance, the Center on Budget and Policy Priorities (CBPP) estimates that one-third of families with children would receive no tax cut. CBPP estimates that more than half of all black and Hispanic families receive nothing from the Bush plan, even though three-fourths of these families include at least one worker.

The President's focus on a "typical family of four" also deflects attention from the fact that many people are not like this archetypal family. It is true that a married couple with two children and annual income of $50,000 would get a $1,600 tax cut, though only after 2005 when the plan is fully phased-in. However, a single mother with two children and a $22,000 annual income would get nothing. A retired widow with no children and an income of $30,000 would get a mere $300. By comparison, a couple making $550,000 with no children would get a $19,000 tax break.

The Bush budget seems designed as if the income tax were the only federal tax. In fact, three-quarters of all taxpayers pay more payroll taxes than income taxes, and the Bush budget does nothing to address this burden. This is because the Bush tax package makes no changes to the earned income tax credit (EITC), which was originally designed in part to offset the impact of payroll taxes on low-income workers.

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