Skip to main content
Op-Ed

Keep Existing Tax Cuts but Freeze New Ones

Peter R. Orszag and William G. Gale

Before Sept. 11, the signature achievement of the Bush administration was a
tax cut that phases in slowly and runs through 2010. Now, since the terrorist
attacks and the recession, some Democrats in Congress want to freeze some of the
future cuts. Republicans say that would hurt the economy and want to make the
cuts permanent.

How about a simple compromise: Make permanent the tax cuts that are already
in place, but postpone the others until they are affordable.

Specifically, any tax cuts not yet in effect should be frozen until the
projected 10-year budget surplus outside of Social Security and Medicare grows
to be at least as large (relative to the economy) as it was when the tax cut
passed. Since about half of the cuts are already in effect, this would give each
side half of what it wants.

For several years, lawmakers on both sides of the aisle promised not to use
the Social Security and Medicare surpluses to finance other programs or tax
cuts. Last May, just before the tax cut was passed, the 10-year projected
surplus outside of Social Security and Medicare was $2.7 trillion.

Given this projection, Congress scaled back President Bush’s proposal,
partially by ending the tax cuts in 2010. Even after the tax cut, Congress
preserved a $1-trillion surplus outside Social Security and Medicare.

Eight months later, the surplus outside Social Security and Medicare has been
replaced by a deficit of about $1 trillion. The tax cuts plainly are not as
affordable now.

If the tax cuts become affordable again, we can meet our military and social
priorities and enjoy the tax cuts at the same time.

Authors

But if the surplus does not recover, freezing future tax cuts would have
several benefits. To the extent the restored funds were spent on social
programs, the country could better meet needs in such areas as health care and
child care. The rest of the restored revenue would reduce future budget
deficits.

Federal Reserve Chairman Alan Greenspan has repeatedly expressed concern that
projected deficits were propping up interest rates and hurting the economy, so
restoring longer-term fiscal discipline would help to spur the economy now.

Administration officials worry that freezing future cuts would stop people
from spending or investing. Yet evidence shows that last summer, Americans
mostly did not spend even the $300 or $600 rebate they received, much less the
ones they were projected to get in future years.

Economic research suggests that people tend not to spend tax cuts
prospectively; they wait until the money is in their pockets. Our proposal would
make the already implemented tax cuts permanent, which should raise their
perceived value to households.

One other element lurks in the background. The tax cuts that have taken
effect benefit households across much of the income spectrum. But most of the
future tax cuts go to the highest-income households.

Freezing the future tax cuts until they are affordable while also making the
existing tax cuts permanent would offer a little to both sides. It’s a true
middle ground on the budget, and it would help clarify our real choices ahead.

More

Get daily updates from Brookings