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www.cbpp.orgRobert
Greenstein
Executive Director
Iris J. Lav
Deputy Director
Board of Directors
David de Ferranti, Chair
The World Bank
John R. Kramer, Vice Chair
Tulane Law School
Henry J. Aaron
Brookings Institution
Ken Apfel
University of Texas
Barbara B. Blum
Columbia University
Marian Wright Edelman
Childrens Defense Fund
James O. Gibson
DC Agenda
Beatrix Hamburg, M.D.
Cornell Medical College
Frank Mankiewicz
Hill and Knowlton
Richard P. Nathan
Nelson A Rockefeller
Institute of Government
Marion Pines
Johns Hopkins University
Sol Price
Chairman, The Price Company (Retired)
Robert D. Reischauer
Urban Institute
Audrey Rowe
ACS State and Local Solutions
Susan Sechler
The Aspen Institute
Juan Sepulveda, Jr.
The Common Experience/
San Antonio
William Julius Wilson
Harvard University |
GREENSTEIN ASSESSES BUSH PLAN
Robert Greenstein,
executive director of the Center on Budget and Policy Priorities, said
today that the $674 billion “growth package” unveiled by President Bush
“represents a radical departure from past, bipartisan actions to help the
economy recover from downturns.” Greenstein commented that “the plan is
remarkable in a number of respects. It is remarkably inefficient as
stimulus, costing $674 billion to inject about $100 billion into the
economy in 2003, when the economy is weak; remarkable in its fiscal
profligacy, swelling budget deficits for years to come; and remarkably
tilted toward those at the pinnacle of the income scale, the very group
that gains the most from last year’s tax cut.”
Greenstein noted that “while the plan contains
middle-class tax cuts, they are temporary. The middle-class tax cuts
simply accelerate tax cuts already enacted. By contrast, the most
affluent Americans would receive a lavish new tax cut that is permanent, the
elimination of taxes on corporate dividends.” He added “over time,
middle-class families could be net losers. There is no ‘free lunch,’
and these tax cuts ultimately would have to be paid for, either through
higher interest rates and slower economic growth caused by swollen deficits
or through budget cuts, most likely in programs for the middle class and the
poor.”
He also said that
states and working-poor families would likely be immediate losers. States
would lose because the dividend tax cut would cost state treasuries $4
billion to $5 billion a year, and the plan contains no offsetting fiscal
relief. Working-poor families would lose because they would receive no tax
cuts (the plan fails to accelerate the components of last year’s marriage
penalty relief and child credit expansion that focus on the working poor),
and these families could be adversely affected by deeper state budget cuts
and higher interest rates.
The full text of
Greenstein’s statement follows:
Text of Statement
The Administration’s
$674 billion growth package represents a radical departure from actions taken
during previous downturns by Presidents and Congresses of both parties. The
proposal is striking in a number of respects.
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The plan is extremely
inefficient as a stimulus. It would cost $674 billion through
2013 but would put out only $59 billion in the first year, the period when
stimulus is needed. With more than $11 in overall cost for every $1 put out
this year, the plan may constitute the most inefficient stimulus during any
downturn in recent American history. Furthermore, much of the $59 billion
itself would not be injected into the economy in 2003 because it would be
saved rather than spent. Both economic research and common sense indicate
that tax cuts for high-income individuals are more likely to be saved rather
than spent than are tax cuts for middle- and low-income workers, and the
dividend tax cut and tax rate accelerations the Administration is proposing —
which would account for half of the tax cuts in 2003 — are heavily skewed to
the top of the income spectrum. Preliminary data from the Tax Policy Center
show that in 2003, some 60 percent of the tax cuts would go to the top 10
percent of taxpayers.
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The plan is striking in its
degree of fiscal profligacy. It would add at least $925 billion
to deficits between 2003 and 2013. (The total figure amounts to at least
$925 billion because the Treasury would have to make at least $250 billion in
increased interest payments on the debt over this period, as a result of the
higher deficits the plan would cause.) It makes sense to increase the
deficit during the present period when the economy is weak, but not after the
economy has recovered. With the huge costs that will result from the 2001
tax cut, the baby boomers’ retirement, and the war on terrorism facing the
nation in the years ahead, it is irresponsible for policymakers to be
advancing profligate policies that would institute new, permanent claims of
this nature on the budget. This action stands in sharp contrast to the steps
taken under President Reagan in 1982, when the marked deterioration of the
fiscal outlook led to bipartisan action to scale back the tax cut passed the
year before, not to large, permanent tax cuts added on top.
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The plan is heavily tilted to
those at the top of the income scale. While the plan contains
middle-class tax cuts, they are temporary — they simply accelerate tax
cuts that have already been enacted. By contrast, the most affluent
Americans would receive a lavish new tax cut that is permanent — the
elimination of taxes on corporate dividends.
There is no “free lunch.”
These tax cuts ultimately would be paid for either by swelling the deficit,
which in the long run would likely result in higher interest rates and less
economic growth, or by deep budget cuts, most likely in programs for the
middle class and the poor. Over time, middle-class families could well
be net losers.
-
Two immediate losers would be
states and working poor families. The plan’s dividend tax cut would
remove more than $4 billion a year from state treasuries, making state budget
deficits deeper at a time when states already face their worst fiscal crises
in 50 years. Since states must balance their budgets each year, the result
would be larger budget cuts and tax increases at the state level. Although
some media reports over the weekend suggested the plan would contain some
fiscal relief for states, it turns out to contain none. (The plan includes
$4 billion for “reemployment training accounts;” this money would finance a
new program and does not represent fiscal relief to states.)
Millions of the low-income
working families that pay payroll tax but do not earn enough to owe income
tax — such as a married couple with two children that earns $20,000 a year —
could lose because they apparently would receive no tax cuts but could face
higher interest rates on purchases they make and be subject to deeper budget
cuts in state-financed programs. Interest rates would likely rise for two
reasons: 1) eliminating the tax on dividends would make stocks relatively
more attractive than bonds, causing interest rates on bonds to rise in order
to attract sufficient capital and thereby raising interest rates throughout
the economy; and 2) the increase in long-term deficits would likely exert
upward pressure on long-term interest rates. Such increases in interest
rates would raise the cost of home mortgages and loans for cars and household
purchases.
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.
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