Revised, March 28, 2007
DESPITE THE RHETORIC, BUDGET WOULD MAKE NATION’S FISCAL PROBLEMS WORSE AND FURTHER WIDEN INEQUALITY
by Robert Greenstein
The President says he
wants to promote fiscal responsibility and address growing inequality, but his
budget fails on both counts. In fact, it would make both problems worse.
In a sign of the
President’s misguided priorities, his budget puts extremely large tax cuts for
the most affluent Americans ahead of the needs of low- and middle-income
families as well as future generations. Low- and middle-income Americans would
be hit by budget cuts in areas from education to protection of the environment
and assistance to the poor. Future generations would foot the bill for the much
larger long-term deficits that the President’s extravagant tax cuts would
produce. The tax cuts in the budget far exceed proposed reductions in domestic
The President argues that his budget is fiscally
responsible, trumpeting the claim that it reaches balance in 2012. But the
budget would be balanced only on paper, omitting well over $100 billion in costs
for that year.
Whether the budget is balanced in 2012 does not
hold great significance because the big fiscal challenge is the severe long-term
deficits that will emerge in the decades after 2012.
Indeed, in the fine print of the budget, the Administration acknowledges that
deficits will shoot up not many years after 2012. The President’s budget
would make these long-term deficits even larger.
Making Income Inequality More Severe
The budget would further widen the yawning
gaps between the extremely wealthy and other Americans. It would essentially
further enrich the most well-off at other Americans’ expense.
- People with incomes of more than $1
million would get tax cuts averaging $162,000 a year (in 2012 dollars) in
perpetuity, according to Tax Policy Center estimates.
- Meanwhile, states would face new
fiscal incentives to push children in families with incomes as low as just over
$35,000 for a family of three off the State Children’s Health Insurance Program
(in the one-third of the states that now cover such children) and, most likely,
into the ranks of the uninsured.
Although nearly six million low-income children remain uninsured today, the
budget fails to provide sufficient funds for the program simply to maintain
current levels of coverage and represents a step backward from the goal of
covering all low-income children.
- Low-income elderly people and others
in low-income households struggling to pay high winter heating bills would face
sharp cuts in the aid they receive through the low-income home energy assistance
- According to the Administration’s own
figures, the number of children in low-income families who receive child care
assistance would be cut by 300,000 between 2006 and 2010.
- Funding for the Head Start program
would be sliced $100 million below the 2007 level in the House-passed Continuing
Resolution, even before adjusting for inflation, a reduction that would follow
several years of essentially frozen funding.
Many low- and moderate-income children, families,
and elderly individuals would be hit by several cuts at the same time. For
example, the 440,000 low-income seniors — one-third of whom are over age 75 —
who now receive a modest bag of foodstuffs each month (the bag costs the
government about $20) to help keep them from running out of food would lose that
aid; the program providing it would be terminated. These poor elderly
individuals could face cuts both in food assistance and in help paying their
heating bills at the same time.
and Fiscal Responsibility
presents its budget as being fiscally responsible. It trumpets the claim that
the budget would be balanced in 2012. But the budget would be balanced in 2012
only on paper; the budget achieves that goal by omitting well over $100 billion
in costs for that year and making optimistic assumptions about the revenue that
will be collected in that year.
- The budget implicitly includes the
assumption that the Alternative Minimum Tax will be allowed to explode and will
affect more than 40 million households in 2012, something no one believes will
happen. The budget includes the cost of AMT relief only through 2007, but omits
the cost of AMT relief in the years after that. The Congressional Budget Office
says that the cost of continuing this relief is $93 billion in 2012 alone, if
the President’s tax cuts are extended.
- The budget also rests on the shaky
assumption that the deep cuts scheduled under current law in payments made to
doctors for services they provide to Medicare patients will actually take
effect. No one believes this will happen either. This assumption makes up to
$20 billion in additional 2012 costs disappear.
- The budget also omits all costs for
the Global War on Terror after 2009, which could run into the tens of billions
of dollars in 2012.
- Finally, the budget employs rosy
revenue assumptions; it assumes $155 billion more in revenue in 2012 than CBO
does for the same policies.
Moreover, whether the
budget is balanced in 2012 is not of great significance. The big fiscal
challenge policymakers face is not the state of the budget in 2012, but the
severe long-term deficits that will emerge in the decades after that. (The
President’s budget acknowledges that “The budget is on an unsustainable path.”)
The policies proposed in the President’s budget would make the long-term path
even less sustainable.)
- Making the tax cuts permanent will add
$2.3 trillion in costs over the next ten years (including the added interest
payments on the debt) if AMT relief is allowed to end, CBO estimates show. Yet
this figure is artificially low, because it rests on the implausible assumption
that a greatly swollen AMT will cancel out a substantial share of the
Administration’s tax cuts.\
- If AMT relief is continued so the AMT
does not cancel out a substantial part of the tax cuts, making the
President’s tax cuts permanent will cost $3.5 trillion over the next ten years,
based on the CBO estimates. (The Administration’s budget substantially
underestimates the costs of making the tax cuts permanent, primarily by assuming
— without explaining it is doing so —that a vastly expanded AMT will cancel out
a hefty share of the tax cuts the Administration claims are essential.)
- The long-term cost of the tax cuts,
combined with the cost of the President’s s defense build-up, would dwarf the
long-term savings from the sizable cuts he is proposing in domestic programs.
As a result, the budget would enlarge deficits in both the near term and the
The President noted last week that “income
inequality disparities is real. Its been rising for more than 25 years….And the
question is whether we respond to the income inequality we see with policies
that help lift people up, or tear others down.”
The President’s comments followed the release in
January of a major CBO report that found income inequality rising rapidly. Leaders such as Alan Greenspan, in one of his final Congressional
appearances as Federal Reserve Chairman, have warned about growing inequality.
The budget would nevertheless further increase income
disparities by providing massive tax cuts for people at the pinnacle of society
and weakening child care, food assistance, and other support for those at the
bottom and the middle of the income scale.
- The Urban Institute-Brookings Institution Tax
Policy Center reports that if the President’s tax cuts are made permanent,
households in the top 1 percent of the population (currently those with
incomes over $400,000) will receive tax cuts averaging $67,000 a year by 2012.
In today’s dollars, that amount is larger than the entire income of the
typical American household.
tax cuts for those with incomes of over $1 million a year would average
$162,000 a year by 2012, according to the Tax Policy Center.
The President’s Budget
Would Decrease Funding
for Domestic Discretionary Programs by 1 Percent
The Administration has suggested that its
budget would increase 2008 funding for domestic discretionary programs by 1
percent over 2007 levels (before accounting for inflation). As it turns out,
their proposals would constitute a $1 billion cut in domestic discretionary
Moreover, within the overall 2008 funding
level, domestic homeland security programs would grow by roughly $3 billion
(see Summary Table 4 on page 154 of the President’s Budget). Thus,
discretionary funding for domestic programs outside homeland security would
fall by about $4 billion, or about 1 percent. (If inflation is taken into
account, the cut in 2008 funding is even larger.)
Our figures differ from the OMB’s for two
reasons. First, the Center’s analysis uses as the 2007 base the funding
levels in the full-year appropriations bill for 2007 that the House passed
last week and the Senate is about to consider, while OMB uses a more
outdated 2007 base (the President’s Budget was completed before work on the
new appropriations bill was finished). Second, our figure excludes all
defense programs, while OMB excludes Pentagon funding but fails to exclude
defense funding in the Department of Energy and a few other departments.
- At the same time, funding for domestic
discretionary programs would be cut a total of $114 billion over five years.
(This cut represents the difference between the Administration’s proposed
funding levels and the funding levels in the full-year Continuing Resolution for
2007 that the House recently passed, as adjusted for inflation.)
By 2012, these programs would be cut by $34 billion.
Proposed Reductions in Domestic Discretionary
The budget identifies the specific cuts it is proposing in discretionary
programs only in 2008. Examples include the following:
- The Commodity Supplemental Food Program, which
provides supplemental food packages worth a little less than $20 each month to
440,000 needy elderly people, would be terminated.
- The Low-income Home Energy Assistance
Program, which helps several million poor families and elderly and disabled
people afford to heat their homes in the winter, would be cut by $420 million,
or 19 percent, below the expected 2007 funding level (the level in the
House-passed Continuing Resolution), adjusted for inflation, and $379 million
below a freeze level. This would be below the funding level for the program in
every year since 2000 (after adjusting for inflation), despite the sharp
increases in fuel prices in recent years and OMB’s own forecast that fuel prices
will be higher in 2008 than in 2007.
- Funding for child care for children in
low- and moderate-income families would be frozen even as inflation causes the
cost of providing child care to rise. A table in the President’s budget itself
shows that the number of children assisted would be cut by 300,000 over the next
few years, from 2.3 million in 2006 to 2.0 million in 2010. Between 2000 and
2010, the drop would be 450,000 children (2.45 million were served in 2000, a
number that has dropped since then due to the failure of funding to keep pace
- Head Start funding would be cut $100
million from the anticipated 2007 level, before adjusting for inflation, which
represents a reduction of more than $200 million when inflation is taken into
account. Since teachers’ salaries and the cost of rent and supplies generally
rise with inflation, to cope with the cut, Head Start programs would need either
to reduce the number of children they serve or to make changes that could
diminish the quality of the program, such as reducing teachers’ salaries, or
cutting back on the educational, health, and other services the program
- The preventive health services block
grant, which helps state and local agencies undertake efforts to prevent or
reduce the incidence of various health problems such as obesity and lead
poisoning, would be eliminated.
Evidence Fails to Support
That its Tax Cuts are Critical for the Economy
The President’s new budget claims that his
tax cuts should be made permanent for the sake of both the economy and the
budget. This claim is belied by the evidence.
The years following the President’s tax cuts
have seen unexceptional economic growth and unusually weak revenue growth.
Despite the large tax cuts enacted in 2001 and 2003, government data show
that the current economic expansion is weaker than the average post-World
War II economic recovery with respect to an array of critical measures,
including economic growth, investment, employment, wages and salaries, and
net worth. Employment growth has been slower during the current recovery
than during any previous expansion since the end of World War II. Moreover,
median income for non-elderly households has fallen for five straight years.
In fact, the economy’s overall performance has been somewhat weaker than in
the recovery of the 1990s when taxes were increased.
Revenues, meanwhile, have declined slightly
over the current business cycle (i.e., between the peak of the last business
cycle in March 2001 and 2006), after adjusting for inflation and population
growth. In previous business cycles, revenues (adjusted for inflation and
population growth) have risen an average of 10 percent. The poor revenue
performance in the current business cycle is a major reason why the nation’s
budgetary position worsened by a greater amount between 2000 and 2006 than
in all but one other six-year period since World War II, going from a
surplus of 2.4 percent of GDP in 2000 to a deficit of 1.9 percent of GDP in
2006. (The largest six-year deterioration occurred between 1998 and 2004 and
also reflected the impact of the tax cuts, as well as other factors.)
number of low-income housing programs would face reductions. Funding for public
housing would be set $377 million (or 5.9 percent) below the expected 2007 level
(the level in the House-passed full-year Continuing Resolution). Supportive
Housing for the Elderly and People with Disabilities would be cut by $269
million, or 28 percent, below the expected 2007 level.
proposed cuts in domestic discretionary programs in 2009 through 2012 are left
unspecified in the budget, but this budget category (i.e., domestic
discretionary programs) includes numerous programs that provide basic supports
and services to low- and middle-income families, such as elementary and
secondary education, job training, environmental protection, veterans’ health
care, medical research, meals on wheels, child care, low-income home energy
assistance, and dozens of others.
Data from back-up tables supplied by the
Office of Management and Budget show that the President’s overall funding levels
for domestic discretionary programs would result in substantial reductions in a
range of such public services that would grow steadily deeper over the next five
years. The OMB tables provide data on the funding levels the President is
proposing in each of 76 budget “subfunctions,” or groupings of programs that are
similar in nature. The OMB tables show, for example, that in 2012:
- Funding for elementary and secondary education
would fall $2.8 billion — or 6.8 percent — below the FY 2007 funding level
(approved in the recent Continuing Resolution) adjusted for inflation.
- Funding for pollution control and abatement
would be cut by $1.4 billion — 15.7 percent — in 2012 as compared to the FY
2007 level adjusted for inflation.
- Funding for health care research and
training — the budget category that includes the National Institutes of Health —
would be cut by 8.9 percent, or $3 billion.
It should be noted that the President’s budget
proposes substantial increases in several international discretionary programs
that are important to people in some of the world’s poorest countries.
These include major increases in programs to combat AIDS/HIV around the world
and in the Millennium Challenge Fund.
Proposed Reductions in Mandatory Programs
budget also proposes net cuts in mandatory programs that total $309 billion over
ten years. (This excludes the cost of the President’s Social Security
private account proposal, as well as the outlay effects of his tax proposals.)
Some $270 billion of these savings would come from Medicare and Medicaid.
Some of the proposed changes in mandatory programs, including some of the
Medicare savings proposals and the proposed reforms in student financial aid
that include an increase in Pell Grants,
merit consideration. Others, however, reflect priorities that favor the very
well-off over low-income or vulnerable Americans. For example, despite the fact
that 5.6 million low-income children are uninsured today, the budget fails to
provide sufficient funds to the State Children’s Health Insurance Program even
to continue insuring the same number of children as the program insures today.
In addition, many of the proposed Medicaid cuts would essentially shift costs to
states, likely leading many states to cut back Medicaid eligibility or restrict
health care services for the low-income beneficiaries whom the program serves.
The budget also would cut the Social Services Block Grant, which provides funds
to states for basic services to vulnerable low-income children, seniors, and
people with disabilities, by $4.4 billion over ten years, or nearly 30 percent
in nominal dollars.
The budget is designed to induce states to cease covering children with family
incomes above 200% of the poverty line, which will be a little above $35,000 for
a family of three in 2008.
ABC News transcript of President’s remarks on Wall Street, January 31, 2007.
Alan Greenspan before the House Financial Services Committee, July 20, 2005.
The baseline used here, based on the House-passed Continuing Resolution and
previously enacted 2007 appropriation bills, does not include emergency
supplemental funding provided for 2007.
While the Pell Grant program is a discretionary program, the Administration
is proposing that the increases in the program be part of a larger
mandatory proposal to overhaul student financial aid programs and the Pell
Grant increase is proposed in the budget as an increase in mandatory
spending (offset by reductions in other mandatory spending).