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Pre-2005 Content Archive

Report

Smaller Deficit Estimate No Surprise: New OMB Estimates Do Not Support Claims About Tax Cuts

Key Findings

  • The facts do not support the Administration’s claim that its new estimates of higher revenues and a lower deficit for 2007 show that its tax cuts are boosting the economy and revenues.
  • History shows that increases in revenue estimates during an expansion are the norm, not the exception.  They occurred in the 1980s after tax cuts, and in the 1990s after tax increases.  Thus, the new estimates tell us nothing about the tax cuts’ effects on the economy.
  • Moreover, the Administration is now forecasting slower economic growth for 2007 than it did in February, so it cannot be claimed that the tax cuts are spurring surprisingly strong growth.
  • Furthermore, since 2001, the overall performance of the economy and revenues has been disappointing compared to previous recoveries.
  • Without the tax cuts, which will cost $300 billion in 2007 alone, the budget would be in surplus this year.
Report

A Balanced Approach to Restoring Fiscal Responsibility

In a recent paper, “Taking Back Our Fiscal Future,” a group of policy analysts from several Washington think tanks proposed a radical change in budget procedures related to Social Security, Medicare, and Medicaid as a way to address budget deficits projected for future decades. They urged Congress to establish 30-year budgets, or caps, for these programs. The White House would conduct a review every five years. If it projected that expenditures would exceed the caps, the programs would face automatic cuts or related tax increases.

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The Signatories

This information is for identification purposes only.  The material in this document represents the views solely of the individuals listed here, not of the institutions with which they are, or have been, affiliated.

Henry Aaron is a Senior Fellow, and the former Director of Economic Studies, at the Brookings Institution.

Nancy Altman is an expert, author, and lecturer on Social Security and private pensions.  She served as chief aide to Alan Greenspan when he chaired the 1982-83 Social Security Commission and, before that, was advisor on Social Security to Senator John Danforth.

Kenneth Apfel is former Commissioner of Social Security and former Associate Director for Human Resources at the Office of Management and Budget.  He is now a Professor of Public Policy at the University of Maryland.

James Blum is former Deputy Director of the Congressional Budget Office.

J. Bradford DeLong is a Professor of Economics at the University of California at Berkeley and a former Deputy Assistant Secretary at the Treasury Department.

Peter Diamond, widely regarded as one of the world’s foremost experts on the economics of retirement, is Institute Professor and Professor of Economics at the Massachusetts Institute of Technology and a past President of the American Economic Association.

Robert Greenstein is Executive Director of the Center on Budget and Policy Priorities.

James Horney is Director of Federal Fiscal Policy at the Center on Budget and Policy Priorities and former Chief of the Budget Projections Unit at the Congressional Budget Office.

Richard Kogan is a Senior Fellow at the Center on Budget and Policy Priorities and former Director of Budget Policy at the House Budget Committee.

Jack Lew is former Director of the Office of Management and Budget.

Marilyn Moon is Vice President and Director of the Health Program at the American Institutes for Research.  She is a former Public Trustee of the Social Security and Medicare Trust Funds and a former Senior Fellow at the Urban Institute.

Van Doorn Ooms is former Chief Economist of the Office of Management and Budget, the House Budget Committee, and the Senate Budget Committee, and is former Senior Vice President and Director of Research for the Committee for Economic Development.

Uwe Reinhardt is a Professor of Economics at Princeton University.  An expert on health care, he also serves as President of the International Health Economics Association and was chair of the Commission on Rationalizing Health Care Resources for the state of New Jersey.

Charles Schultze is Senior Fellow Emeritus at the Brookings Institution, where he also served as Director of Economic Studies.  He has served as Director of the Office of Management and Budget (then called the Bureau of the Budget) and Chair of the President’s Council of Economic Advisers.

Robert Solow is Emeritus Institute Professor and Professor of Economics at the Massachusetts Institute of Technology.  He was awarded the Nobel Prize in economics for his work on economic growth, and he received the John Bates Clark Award (given to the best economist under age 40) from the American Economic Association, where he is also a past President.

Paul Van de Water is Vice President for Health Policy at the National Academy of Social Insurance and a Senior Fellow at the Center on Budget and Policy Priorities.  He is former Assistant Director for Budget Analysis at the Congressional Budget Office and former Assistant Deputy Commissioner for Policy at the Social Security Administration.

Report

House-Passed Housing Tax Package Improves Significantly on Senate Version: But Addressing the Foreclosure Crisis Will Require Other Measures

Key Findings

    The House-passed housing tax package improves on the Senate’s version in several important respects.

  • It omits the Senate’s net operating loss provision, an expensive business tax break that would neither help homeowners nor boost the economy.
  • It temporarily expands the Low-Income Housing Tax Credit and includes a package of other changes that would enhance the credit’s effectiveness.
  • It does not include a provision of the Senate bill that would effectively prevent local governments from increasing property tax rates, seriously aggravating their fiscal problems.
  • It complies with the Pay-As-You-Go (PAYGO) rule: the cost of the package is fully offset over 10 years.

    However, the House-passed package does include two provisions — a credit for first-time homebuyers and a non-itemizer property tax deduction — that are not the best use of scarce resources.

    While some provisions of the tax package have merit, by itself the package would do little to address the foreclosure crisis. Measures passed by the House and approved by the Senate Banking Committee to help families struggling to keep their homes are far more important in this respect. So are measures passed by the House and Senate to assist communities especially hard hit by foreclosures.
Report

Well-Designed, Fiscally Responsible Corporate Tax Reform Could Benefit the Economy: Unpaid-For Rate Cuts Would Likely Hurt Most Americans in the Long Run

Key Findings:

  • Some advocates of cutting the corporate income tax rate have greatly exaggerated both the level of tax that U.S. corporations pay and the economic effects of the corporate income tax.
  • While the statutory U.S. corporate tax rate is relatively high, effective corporate tax rates — the share of their profits that corporations actually pay in taxes — are much lower, due to the plethora of corporate tax breaks in the tax code.
  • Effective tax rates also differ substantially among different types of investment. For example, some categories of corporate investment are taxed at rates close to the statutory rate, while debt-financed investment is subject to a negative effective marginal rate.
  • These large discrepancies create opportunities for revenue-neutral or revenue-raising tax reforms that could benefit the economy by leveling the playing field for different types of investment and thereby removing economic distortions that the current tax code creates.
  • The evidence does not support claims that unpaid-for (i.e. deficit-financed) corporate tax cuts would significantly benefit the economy. In fact, a Joint Committee on Taxation analysis found that such tax cuts would actually slightly reduce economic growth over the long run.
  • Because deficit-financed tax cuts eventually would have to be paid for (through reductions in programs or increases in other taxes), they would probably leave most Americans worse off even if they generated small economic gains.
     
Report

How Low-Income Consumers Fare in the Senate Climate-Change Bill

Key Findings:

  • Well-designed climate-change legislation can allow low-income consumers to play their role in reducing greenhouse-gas emissions without cutting into their budgets, and can thereby avoid deepening poverty.
  • The legislation that the Senate will consider this week relies on two primary mechanisms to deliver consumer relief: unspecified tax provisions and programs operated through utility companies.
  • The exact amount of assistance that will be available to low-income consumers under these two provisions is uncertain, and will depend on subsequent decisions by the Finance Committee and utility companies.
  • Before the legislation is finalized and enacted, a larger pool of resources for consumer relief, greater clarity on the amount provided to low-income consumers, and improvements in the delivery mechanisms used to reach them will be needed.
Report

Claims That a Modest Tax Surcharge on Millionaires Would Damage Small Businesses and the Economy Do Not Withstand Scrutiny

Key Findings:

  • Only 1.2 percent of all households with business income would pay the tax surcharge that the House passed last week as part of the supplemental appropriations bill.
  • That figure likely overstates the effect of the surcharge on small business owner-operators, since many of those who would be affected are wealthy individuals who are not business proprietors, but rather are passive investors who play no role in the day-to-day operations of the businesses they invest in.
  • The few actual small business proprietors who would pay the surcharge are not likely to scale back their hiring or investment because of it. Nor is the surcharge likely to have any perceptible impact on the economy.
  • The experience of the 1990s alone should refute opponents’ dire predictions. The overall economy, employment, wages and salaries, and investment all grew more rapidly in the 1990s, when the top individual income tax rate was 39.6 percent, than in more recent years, when the top rate was 35 percent.
  • The surcharge will take back only a very small fraction of the massive tax benefits that very high-income households are receiving as a result of the 2001 and 2003 tax cuts.
Report

Improving the Medicare Savings Programs Would Help Low-Income Seniors Cope With Higher Medical Expenses

Key Findings

  • Seniors pay a much larger share of their income in out-of-pocket health costs than non-seniors do. The burden is especially great for seniors with low incomes; taking into account medical expenses would push an additional 2.4 million seniors below the poverty line.
  • The Medicare Savings Programs, which help low-income Medicare beneficiaries pay their premiums and cost-sharing, have low participation because program rules are complex and many people are unaware of the programs.
  • MedPAC, Congress’s official advisory body on Medicare payment policy, has recommended several improvements to the Medicare Savings Programs to boost enrollment. Congress could include these long-overdue improvements in legislation now being prepared to avert a cut in Medicare physician payments.
  • In sharp contrast, continuing to overpay private Medicare Advantage insurers so they can use a portion of the overpayments to potentially reduce cost-sharing for all enrollees represents a poorly targeted approach to helping low-income beneficiaries.
Report

Improving the Refundable Child Tax Credit

Key Findings

  • Some 6 million children in working-poor families are currently barred from receiving the Child Tax Credit, a $1,000 per-child tax benefit.
  • An additional 10 million children in low-income working families receive only a partial Child Tax Credit. Families need earnings well above the poverty line — and even farther above what full-time minimum-wage work pays — to qualify for the full credit. A single parent with two children would need earnings of at least $22,630 in 2008 to receive the full benefit.
  • Because of its current structure, the Child Tax Credit leaves out the very children whose families face the greatest financial hardship.
  • The current structure of the Child Tax Credit also punishes workers whose earnings fail to keep pace with inflation. Such workers see a smaller child tax benefit each year. For example, a worker making $14,500 (full-time earnings at the new minimum wage) would qualify for a $368 credit in 2008 but only a $278 credit by 2010.
  • Legislation introduced by Senators Olympia Snowe (R-ME) and Blanche Lincoln (D-AR) would make the Child Tax Credit available to about 2 million children who currently are ineligible. A temporary measure included in the Ways and Means Committee tax “extenders” bill would extend the credit to 2.9 million otherwise- ineligible children in 2008. (For state-by-state estimates of these proposals’ impact, see the appendix tables below.)
Report

How CBO Estimates the Cost of Climate-Change Legislation

Key Findings:

  • If climate-change legislation uses all of the proceeds from auctioning emission allowances for spending increases or tax reductions, the Congressional Budget Office will “score” the legislation as increasing the deficit.
  • This is because CBO assumes that the imposition of an “indirect business charge” — in this case, the cost of an emissions allowance — will reduce federal income and payroll tax revenues. As a result, the net increase in revenues from the legislation will be less than the gross proceeds from auctioning emission allowances.
  • Legislation such as the Lieberman-Warner bill thus must return a portion of the proceeds from auctioning allowances to the Treasury or it will violate Pay-As-You-Go and other budget rules.
  • Well-designed, fiscally responsible legislation that takes this requirement into account can slow global warming and still generate sufficient revenues to meet a variety of public purposes, ranging from increasing basic research on alternative energy sources to ameliorating the effects of increased energy costs on low- and moderate-income families.
Report

The Effects of Climate-Change Policies on the Federal Budget and the Budgets of Low-Income Households

Key Findings:

  • In designing the strong policies that are essential to address climate change, policymakers should take into account the implications for family budgets, as well as the federal budget.
  • Restrictions on greenhouse-gas emissions will make energy-related products costlier. Low-income consumers will be hit hardest, since these products take up a larger share of their incomes. If they are not shielded from these higher costs, many low-income families will be pushed into (or deeper into) poverty.
  • Climate-change policies also will create other needs, such as for more basic research on alternative-energy sources.
  • But climate-change policies can generate the revenues needed to fully address these needs — as long as these revenues are not given to energy companies and other emitters as windfall profits.
  • Thus, if a “cap-and-trade” system is adopted, the allowances required to emit carbon dioxide should largely (or entirely) be auctioned off rather than given away free to energy companies as windfall profits, and the proceeds should be used wisely. Otherwise we risk exacerbating poverty, gaps between rich and poor, and the nation’s budget problems.
Report

HUD Budget Contains Major Funding Shortfalls

Key Findings

To prevent losses of housing assistance to low-income families and communities, Congress would have to provide $6.5 billion more than the President’s 2009 request for HUD, for two main reasons.

  1. In each of the last several years, Congress has used roughly $2 billion in recaptured funds from earlier years to help finance HUD programs. Such funds will not be available in 2009.
  2. The President’s budget fails to provide funding increases in HUD’s three main rental assistance programs needed to sustain assistance for the low-income families now being served:
    • To renew all Housing Choice vouchers in use, an increase of $868 million is needed in 2009 (or $1.3 billion above the President’s level, which would eliminate vouchers for at least 100,000 families).
    • The Public Housing Operating Fund requires $920 million above the 2008 level (and $820 million above the President’s budget) to prevent the deterioration (and ultimate loss) of affordable units.
    • The budget also fails to address adequately a one-time, multi-billion-dollar shortfall in the Section 8 Project-Based Rental Assistance program, which risks the loss of thousands of affordable apartments for some of the nation’s most vulnerable families.
Report

Federal Spending, 2001-2008: Defense Is a Rapidly Growing Share of the Budget, While Domestic Appropriations Have Shrunk

Key Findings

  • There has been no rapid rise in funding for domestic discretionary programs in recent years; in fact these programs have shrunk both as a share of the budget and as a share of the economy.
  • In contrast, funding for defense and related programs has exploded. Since 2001, it has jumped at an annual average rate of 8 percent, after adjusting for inflation and population — four times faster than the average rate of growth for Social Security, Medicare, and Medicaid (2 percent), and 27 times faster than the average rate for growth for domestic discretionary programs (0.3 percent).
  • Funding for defense and related programs has shot up by 2 percent of GDP in just seven years. It is expected to take more than two decades for Social Security to grow by 2 percent of GDP.
  • Even when costs for Iraq, Afghanistan, and the “global war on terror” are excluded, funding for the regular defense budget has risen at a stunning rate that dwarfs the growth rates for all parts of the domestic budget.
  • The combined effect of the Administration’s tax cuts and its defense spending increases (including the war) has been a budget deterioration equal to 3.3 percent of GDP since 2001. By contrast, increases in costs for all domestic programs combined have cost a little less than 0.6 percent of GDP.
Report

Tax Foundation Figures Do Not Represent Typical Households' Tax Burdens: Figures May Mislead Policymakers, Journalists, and the Public

Key Findings:

  • The Tax Foundation bases its "Tax Freedom Day" calculation on the share of total national income paid in taxes.
  • While this figure can be useful for assessing overall revenue levels, it does not represent the share of income that the typical American pays in taxes.
  • Because the federal tax system is progressive, the share of income that most Americans pay in federal taxes is considerably lower than the overall level of revenues as a share of total national income.
  • Estimates from the Congressional Budget Office (CBO) show that middle- and even upper-middle-income Americans pay less of their income in federal taxes than the “average” tax burden reported in the Tax Foundation’s “Tax Freedom Day” report.
  • In fact, the CBO estimates indicate that some 80 percent of U.S. households pay federal tax at rates lower than the Tax Foundation’s reported average.
  • Journalists and others who report on “Tax Freedom Day” as if it represented the day until which the typical or average American must work to pay his or her taxes are misusing these figures and fostering serious misimpressions about the level of taxes most Americans pay.
Report

Almost All Large Iowa Manufacturers Are Already Subject to "Combined Reporting" in Other States

Key Findings

Governor Culver has called for the enactment of “combined reporting” (CR), a corporate income tax reform aimed at nullifying tax shelters used by large multistate corporations. Many legislators appear to be concerned that this could lead companies to leave Iowa or shun the state for new investments. However, an investigation of the location decisions of 34 large Iowa manufacturers demonstrates that such concerns are unwarranted:

  • 31 of 34 have chosen to maintain facilities in at least one combined reporting state.

  • Half have facilities in 5 or more CR states, 5 have facilities in 10 or more, and 2 have facilities in every one of the 20 CR states.

  • Several companies have long-maintained their headquarters in CR states, including Deere, Kraft, Cargill, ADM, and 3-M.

  • Several of the most outspoken opponents of CR have facilities in numerous CR states, including Deere and Alcoa.