Tax Cut’s Trillion-Dollar Question

William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

August 2, 1999

If you were given a trillion dollars to fix the nation’s social and economic problems, what would you do? The possibilities, of course, are endless. Shelter the homeless. Educate and provide health care to children. Improve retirement security. Repair the environment. Rebuild the cities. Pay down the public debt. Give each adult an equal cash rebate.

This is no mere academic question. It is precisely the issue Congress debated the last two weeks, and one America will need to consider over the next decade. The federal budget surpluses for that period are estimated at $2.9 trillion. About $1.9 trillion will accrue in the Social Security trust fund, and all parties agree it should be left there. But that still leaves $1 trillion.

Republicans in the House came up with a remarkable answer. In their view, our most pressing national crisis is that the very wealthiest households in the very wealthiest economy in the history of the world urgently need a huge cut in taxes.

Never mind that the economy is booming. Never mind that after-tax real incomes in the top 1 percent of households have more than doubled during the last 22 years, while incomes in the bottom 80 percent have been flat. Never mind that the stock market has risen to previously unimagined heights, with gains accruing largely to the wealthiest.

Despite all that, the House voted to cut income tax rates by 10 percent, slash capital gains taxes, and eliminate the estate tax. These and other changes would reduce tax revenues by an estimated $792 billion during the next 10 years. The added interest payments on federal debt would cost $130 million or so. Both of these figures will be far larger in the second decade after such a plan is implemented because the cuts are phased in over time and don’t reach full force until after 2009.

Republicans in the Senate voted Friday for a 10-year tax cut of the same size as the House. The Senate bill is laden with special features and targeted subsidies.

Congress’s acts are so cynical and irresponsible on so many grounds, it may be hard to keep track. So get out your scorecard and let’s try.

Fairness. According to estimates from Citizens for Tax Justice, the House bill cuts taxes for the top 1 percent of households—those with more than $300,000 annual income—by an average of $54,000 per year (more than the entire income of about 70 percent of all American households).

In sharp contrast, households in the bottom 60 percent get a tax cut of $175—about $3.50 per week. The Senate bill is not quite so skewed. But even so, the vast proportion of the benefits would go to the wealthiest households.

The Economy. It is hard to imagine a worse time to stimulate the economy via massive tax cuts. Indeed, just as the Republicans were gleefully voting to slash revenues, Fed Chairman Alan Greenspan was on Capitol Hill—twice—testifying that large tax cuts would be premature and economically unwise. The Fed just raised interest rates, and Mr. Greenspan’s testimony indicates it’s still taking a hard line. Any stimulative effect would thus likely be offset by Fed action.

Simplicity. Although tax-cut advocates pay lip service to simpler taxes, it’s now clear such pronouncements are merely a bait-and-switch tactic. Although they could have used the opportunity to dramatically simplify taxes, Republican leaders pushed through a bevy of complicating provisions that could boggle taxpayers for years to come.

Fiscal responsibility. Even if the surplus accruing in the Social Security trust fund is left alone to grow, the nation still faces a long-term deficit in the program and a larger one in Medicare because of the demand that will be created by lengthening life spans and retiring baby boomers. Tax cuts will make these problems much more difficult to resolve by more than tripling the long-term fiscal imbalance, according to Congressional Budget Office data.

In budget language, the cuts are paid for with surpluses in the non-Social Security portion of the budget. In plain English that means they were financed by reducing real government spending on education, environment, infrastructure, health, and so on by more than $500 billion, and by raiding government trust funds for Medicare and military and civilian pensions to the tune of another $500 billion.

Advocates like to note that the surplus came from the American people and therefore should go back to them. But future Social Security and Medicare liabilities also “belong” to Americans. The real question is which Americans—current or future—will pay for the promises made by yesterday’s and today’s politicians. Tax cutters seem to have no problem living with the benefits they have promised, but don’t seem willing or able to pay for them.

After the House and Senate meet in conference, the administration will have its turn to veto what’s likely to be the most irresponsible tax legislation in years.

It has been astonishingly hot in Washington this summer. One can only hope that, when it comes time to make the final decisions, cooler heads will prevail.