Senate Leadership
Tax Cuts Swell After 2002,
Cost More Than Tax Cuts In Vetoed 1995 Budget Bill
Proposal also Skewed More Toward the Affluent than the 1995 Plan
The tax cuts the Senate Republican Leadership unveiled last month would cost more and direct a larger share of their benefits to high-income individuals than the "Contract with America" tax cuts in the Republican budget that President Clinton vetoed in late 1995, according to a study the Center on Budget and Policy Priorities issued today.
The study also finds the Senate leadership’s tax cuts are designed in such a fashion that the costs are kept artificially low during the five years ending in 2002, the year the budget is supposed to be balanced, but mushroom after that. Relying on official cost estimates of these bills from the Joint Congressional Committee on Taxation, Congress’ official scorekeeper on tax matters, the Center found the cost of the tax cuts would rise from $201 billion over the first five years to $325 billion in the second five years, for a 10-year total of $526 billion. As a result, the tax cuts would cost 60 percent more in the five years after 2002 than in the five years ending in 2002.
The Center reported that the cost of the tax cuts would reach $73 billion a year by 2007, the tenth year the tax cuts were in effect, and continue rising after that. The cost of the Leadership tax proposals would exceed $750 billion in subsequent 10-year periods, the Center concluded.
The Center released its analysis at a press conference in Washington, where it was joined by Martha Phillips, executive director of the Concord Coalition, and Robert Reischauer, a budget expert at The Brookings Institution who formerly directed the Congressional Budget Office.
Mushrooming Tax Cuts Place Deficit Reduction Goals at Risk
"These tax cuts are being advanced at a time when there is growing bipartisan agreement on the desirability of reaching budget balance and keeping deficits under control as the retirement of the baby boom generation approaches," said Iris Lav, the report’s author and the Center’s associate director. "The larger and more backloaded the tax cuts enacted this year, the more difficult it will be to attain these goals in years after 2002 and the more adverse the nation’s long-term fiscal outlook will be."
"These new tax cut proposals are of particular concern," Lav added, "because they are built around a series of devices that keep their costs artificially low between now and 2002. Their burgeoning costs after 2002 would mean either that deficits returned in those years, partially undoing prior deficit reduction achievements, or that basic programs serving millions of Americans would be subject to deeper cuts in those years than leaders of either party now acknowledge favoring."
The Center’s analysis found that keeping the budget in balance in 2007 if these tax cuts become law would entail reductions in federal programs 50 percent larger than the reductions that would be needed to balance the budget in that year if the tax cuts were not enacted. The budget cuts required to balance the budget in 2002 would need to be 39 percent deeper if the leadership tax proposals became law, the study said.
"It is unlikely that budget cuts of the magnitude needed to maintain budget balance if these tax cuts are approved would be achievable and sustainable," said Robert Greenstein, the Center’s executive director. "The result could be rising deficits in the very years we need to make the greatest progress on the deficit, the years before the baby boom generation begins to retire."
Leadership Tax Cuts Exceed Those Congress Approved in 1995 and 1996
The analysis also found the Senate leadership tax cuts would cost more over the next 10 years than the tax cuts in the budget President Clinton vetoed. The new tax cuts also would cost nearly twice as much as the tax cuts assumed in the budget resolution the Republican Congressional majority approved in 1996. Last year’s budget resolution assumed tax cuts of $122 billion over six years, the Center noted, while the new proposals total $201 billion over five years.
The reason the new tax proposals would cost more than those Congress passed in 1995, the analysis found, is that the new legislation contains larger and costlier versions than the 1995 bill of three major tax breaks primarily benefitting upper-income taxpayers — a capital gains tax cut, expansion of tax preferences for Individual Retirement Accounts, and provisions cutting taxes on large estates passed on to heirs. The 10-year cost of these three tax cut provisions is $120 billion larger in the new plan than in the vetoed legislation.
The increase in the size of these three tax cuts also results in the Leadership plan being more heavily titled toward high-income households than the 1995 legislation, which itself heavily favored such households, the Center found. The Center’s analysis shows that because the capital gains, IRA, and estate tax cuts mushroom in cost after 2002, the tax package becomes increasingly skewed toward high-income households with each passing year.
Tax cut provisions that confer a majority of their benefits on middle-class households account for 61 percent of the revenue loss from the Leadership tax proposals during the first five years, the Center found, but only 33 percent of the tax cut benefits in the second five years and just 30 percent by the tenth year. When the tax cuts take full effect, they primarily benefit the well-to-do rather than middle-income households, the analysis noted.
The analysis also found that the 30 percent of the tax cut benefits that would go for middle-income relief in the tenth year is far below the 46 percent of tax cut benefits that would have gone for such relief under the legislation Congress passed and President Clinton vetoed in 1995.
The Center’s findings on the extent to which the Leadership tax cuts would primarily benefit high-income households when the tax cuts are phased in fully is consistent with the findings of a recent study by Citizens for Tax Justice. Citizens for Tax Justice found that when S. 2, the principal Leadership tax bill, is phased in fully, the bottom 80 percent of households would receive only 25 percent of the tax cut benefits. The top five percent of households would garner 51 percent of the benefits.
Leadership Tax Cuts Three
Times Larger than Clinton Tax Cuts,
But Clinton Cuts Grow Rapidly After 2002
The Center’s analysis also found that the Leadership tax cuts have more than three times the cost of the Clinton tax cut proposal over the first 10 years. The analysis notes that the net cost of the tax changes in the Administration’s budget, after accounting for offsetting revenue-raising measures, is $131 billion over the ten years through 2007. (This is the Joint Committee on Taxation estimate, assuming budget targets are met and tax cuts therefore do not sunset.)
If one assumes the Senate Republican Leadership would support the Administration’s proposals to extend several expired taxes and nets the resulting savings against the cost of the Leadership tax plan, the Leadership tax cuts still cost $440 billion over 10 years, more than three times the cost over the next ten years of the Administration proposals, the analysis finds.
Nevertheless, the Administration tax proposal — like the Leadership plan — is substantially backloaded; it grows rapidly in cost after 2002. The Clinton proposal, net of offsets, would cost twice as much in 2007 as in 2002 — nearly $21 billion in 2007 compared to just over $10 billion in 2002. As a result, the Administration’s tax cuts, like the Leadership proposals, would increase the difficulty of budgeting prudently for the approaching retirement of the baby boom generation.
Tax Cuts Primarily Benefitting the Affluent Grow Rapidly
The analysis assesses the extent to which the three Leadership tax cut provisions that primarily benefit upper-income households — the capital gains, IRA and estate tax cuts — would grow sharply in cost. It finds:
A large volume of studies has found that capital gains tax cuts are heavily skewed toward high-income investors. Households with incomes exceeding $100,000 a year receive approximately three-quarters of all capital gains income and would receive the lion’s share of the benefits from these tax cuts. While a growing number of middle-income households hold some investments that yield capital gains, the average amount of their capital gains income tends to be small and is dwarfed by the levels of capital gains income that wealthy investors receive.
Studies of earlier proposals to grant IRA tax advantages to upper-middle and high-income individuals with employer-sponsored retirement plans found that 95 percent of the tax benefits from such proposals would go to the top fifth of taxpayers.
While tax breaks primarily benefitting high-income households would mushroom in cost, the Center found, the principal tax proposal conferring the majority of its benefits on middle-income households — the $500 child credit — would decline in cost and value over time. This is primarily because the $500 credit level would not be indexed for inflation.
It is because the capital gains, IRA and estate tax cuts explode in cost after 2002 while the cost of the child credit declines that the Leadership tax package is, over the long term, primarily a tax relief package for high-income households, the analysis said.
Commenting on the Leadership tax proposals, Greenstein observed that some Members of Congress who argue the federal government cannot afford to extend health insurance to uninsured children or to expend $2 billion to $3 billion a year to retain subsistence benefits for legal immigrants who are old and disabled are proposing to spend $73 billion a year by 2007 on tax cuts primarily benefitting the well-off. He added that some who have criticized the Clinton budget for backloading its spending cuts are proposing to backload tax cuts they favor.
These tax proposals almost certainly would widen the already-large gaps between the wealthy and other Americans, Greenstein added, both because the well-to-do would secure the lion’s share of the tax cut benefits and because the burgeoning tax cuts would result in substantially deeper cuts than otherwise would be needed in basic programs upon which both middle-class families and the poor rely.
Senate Leadership Tax Proposals:
Mushrooming Tax Cuts For High-Income Taxpayers Would
Jeopardize Long-Term Budget Integrity, by Iris
J. Lav