The Debate over Expiring Tax Cuts: What about the Deficit?

Adam Looney
Adam Looney
Adam Looney Nonresident Senior Fellow - Economic Studies

August 11, 2010

As the economy begins to recover from the Great Recession, policymakers must confront the next fiscal challenge: the long-run federal deficit. Over the next ten years, the cumulative deficit is projected to exceed $10 trillion if current budget policies are continued.  Addressing the deficit will require extremely difficult and unpopular tradeoffs.  Consider that in 2020 federal spending on Social Security, Medicare, Medicaid, defense, and interest on debt will exceed 106 percent of 2020 tax revenues, according to the Congressional Budget Office.   Clearly, balancing the budget will require either cutting these valued programs (to say nothing of the rest of federal spending) or raising taxes.

The first opportunity to confront the deficit is the impending expiration of the 2001 and 2003 tax cuts. From a budgetary perspective, the price of extending all of the cuts is steep; full extension would contribute $3.7 trillion to the deficit over the next ten years. In a first step toward addressing the long-run deficit, the Obama administration’s budget proposes to allow a small portion of these tax cuts to expire on schedule. New estimates from the Urban-Brookings Tax Policy Center help illustrate the tradeoffs involved between deficit reduction and the impact on American taxpayers from allowing some of the tax cuts to expire.