Washington, DC 20002
Iris J. Lav
Board of Directors
David de Ferranti, Chair
John R. Kramer, Vice Chair
Henry J. Aaron
Barbara B. Blum
Marian Wright Edelman
James O. Gibson
Beatrix Hamburg, M.D.
Richard P. Nathan
Robert D. Reischauer
Juan Sepulveda, Jr.
William Julius Wilson
MOST HOUSEHOLDS LIKELY TO BE
When Congress enacted the tax cuts, it chose to finance
them through higher budget deficits, pushing their costs into future
years. That makes the tax cuts look free, but of course theyre no
more free than any other item bought on credit, said
To correct the misperception that the tax cuts have no costs, the report examines two possible ways of paying for them and finds that under both scenarios, the bottom four-fifths of households (i.e., those with incomes of approximately $76,400 or less) would be net losers, on average, by substantial amounts. In contrast, the highest-income fifth of households especially those with exceptionally high incomes would be net winners by large amounts.
Households in the middle fifth of the income spectrum, for example, will receive an average tax cut of around $650 (in 2004 dollars) when the tax cuts are fully phased in, but they would end up about $230 or $870 worse off per year when the tax cuts are paid for, depending on which of the two scenarios examined by the report is used. Households earning over $1 million would end up about $60,000 or $135,000 ahead per year, on net, again depending on the scenario examined.
In all, the spending cuts and/or tax increases would cost the bottom 80 percent of households $27 billion or $113 billion (depending on which scenario is used) more per year than these households gained from the tax cuts. This amount would effectively be transferred to the top 20 percent of households, which would gain $27 billion or $113 billion more per year from the tax cuts than they lose from the spending cuts and/or tax increases. The bulk of the transferred funds would go to households with incomes above $200,000.
Basically, the bottom 80 percent of households will end up paying for substantial tax cuts for the top fifth of the population, said William G. Gale, co-director of the TPC and a co-author of the report.
Under the first of the reports two scenarios for paying for the tax cuts, each household would pay an equal dollar amount each year, as could occur if the tax cuts are financed largely or entirely through spending cuts. Under the second scenario, each household would pay the same percentage of its income each year. This could occur if the tax cuts are financed through a combination of spending cuts and progressive tax increases.
While other scenarios can be imagined, most households are likely to wind up as net losers under almost any scenario other than repealing major parts of the tax cuts:
Not Paying for
tax-cut advocates have argued that payment for the tax cuts can be postponed
independent researchers, the Congressional
The tax cuts will worsen this situation, forcing even more drastic measures to avert very large, persistent deficits that threaten significant economic damage over time and are virtually certain to become unacceptable to financial markets.
tax-cut advocates contend that the tax cuts will pay for themselves by
generating new economic growth. Yet studies by the Congressional
Theres no getting around the fact that eventually, were going to have to pay for these tax cuts through spending cuts and/or tax increases, said Peter R. Orszag, co-director of the TPC and a co-author of the report. Right now were only seeing half the story the benefits many people are receiving from the tax cuts. But when the bill comes due, most Americans are likely to find that theyve lost more than they gained.
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The Center on Budget and Policy Priorities is a nonprofit, nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs. It is supported primarily by foundation grants.
The Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, aims to clarify the nations tax and fiscal choices by providing independent, timely, and accessible analysis of current and emerging issues.