January 23, 2004

by John Springer

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A new Center report, The President’s Proposal to Make Tax Cuts Permanent, examines the proposal in the President’s State of the Union address to make permanent a range of tax cuts that are scheduled to expire by the end of 2010.  (Last year’s budget included a similar proposal, but the subsequent enactment of a new round of tax cuts has increased the cost of making the tax cuts permanent.)  The Administration’s proposal would have the following effects:

Policies rooted in fiscal discipline are more likely to be sustainable over the long run than unaffordable tax cuts that enlarge high deficits.  Thus, these policies are more likely to lead to the type of certainty about the fiscal environment that encourages desired levels of investment and economic growth.  This conclusion is supported by two prominent recent reports:  a new analysis by former Treasury Secretary Robert Rubin, Brookings Institution economist Peter Orszag, and Wall Street economist Allen Sinai on the dangers of sustained large budget deficits, and a report the International Monetary Fund released in January 2004 on the U.S. fiscal situation.  Both reports emphasize the uncertainty in financial markets that a continuation of current fiscal policies — of which the tax cuts are a large part — risks exacerbating.

Moreover, the cost to middle- and low-income households of making the tax cuts permanent is likely to outweigh the modest tax cuts that many of these households would receive.  This cost includes the higher amounts these households may pay for various services if increasingly large budget cuts are instituted to help pay for the tax cuts, as well as the impact of higher interest rates and other possible adverse economic effects of the enlarged deficits.

The Administration often emphasizes the benefits of its tax cuts for middle-class families with children.  These families, however, typically benefit from only three of the tax-cut provisions: the increase in the child tax credit to $1,000, the creation of the 10 percent tax bracket, and tax relief for married couples.  These three provisions could be made permanent for one-fifth of the cost of making all of the tax cuts permanent.