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Time for Hard Choices — Not Hypocrisy

Kathy Ruffing and I recently noted that the cost of extending the Bush-era tax cuts for upper-income taxpayers roughly equals the amount of Social Security’s 75-year shortfall. Today at The Atlantic, Megan McArdle questions both our estimate and our analysis. Here’s why our comparison makes sense.

First of all, the $700-billion figure that McArdle cites isn’t the full 10-year cost of the high-income tax cuts. It’s only the revenues that President Obama’s upper-income tax proposal would generate. The President’s proposal, however, also would reduce the tax rate on dividends from 39.6 percent under current law to 20 percent for high-income taxpayers. In addition, it would extend the 28-percent income tax bracket up to $200,000 for individuals and $250,000 for couples. Adding these two items, the total cost of the upper-income tax cuts is $837 billion over the 2011-2020 period and $120 billion in 2020 alone, based on estimates from the Joint Committee on Taxation and the Department of the Treasury. That’s about 0.5 percent of gross domestic product (GDP) in 2020.

Income taxes tend to grow as a share of income each year because rising real incomes push people into higher tax brackets, and we project that the high-income tax cuts will cost about 0.7 percent of GDP over the next 75 years. Social Security’s trustees estimate that Social Security’s shortfall over the next 75 years also equals 0.7 percent of GDP, so the cost of the upper-income tax cuts and the amount of the Social Security shortfall are about the same. McArdle correctly notes that the Social Security shortfall 75 years from now is higher than the 75-year average, but so is the cost of the upper-income tax cuts.

Despite what McArdle implies, the Center has not suggested that “you could ‘pay for’ the Social Security shortfall by rescinding the Bush tax cuts on the rich.” We have made quite clear that President Obama and Congress should let the upper-income tax cuts expire and devote the proceeds to deficit reduction. At the same time, as Kathy and I wrote, we have consistently argued that Congress should enact revenue and benefit changes that would place Social Security on a sound long-term financial footing.

In comparing the high-income tax cuts to the Social Security shortfall, we wanted to illustrate the hypocrisy of Members of Congress who argue that the tax cuts are affordable but Social Security is not, even though their cost is about the same.