Rev. July 29, 1999

Creative Arithmetic to Justify $800 Billion Tax Cut
Does Not Withstand Scrutiny
by James Horney(1) and Robert Greenstein

Table of Contents

A Modest Tax Cut?

Devoting the Majority of the Surplus to Help Social Security

The "Increase" in Discretionary Spending

Providing Resources for Medicare

Some policymakers are arguing that the proposed $792 billion tax cut over 10 years is balanced and responsible because:

These claims all are either misleading or inaccurate.


The 25 Percent Figure

The Congressional Budget Office projects a total budget surplus of $2.9 trillion over the next 10 years. (See box below.) Thus, the proposed $792 billion tax cut would equal about a quarter — 27 percent to be precise — of the projected surplus.

The implication, however, that a $792 billion tax cut is thus a modest tax cut that leaves nearly three-quarters of the surplus for other uses is highly misleading.

How Large is the Projected Surplus?

Some policymakers who support the tax cut have been citing a surplus figure of more than $3.3 trillion over the next 10 years, rather than CBO's $2.9 trillion figure. The $3.3 trillion figure is not useful; it is derived by assuming $400 billion in additional reductions in discretionary programs over the next 10 years, on top of the quite-substantial reductions needed to comply with the existing discretionary spending caps. Congress appears unable to pass the reductions needed to keep discretionary spending within the caps. The likelihood of an additional $400 billion in the reductions being made is near zero. The standard CBO surplus projections are the more appropriate figures to use. (For a further discussion of discretionary spending issues, see below.)


Devoting the Majority of the Surplus to Help Social Security

The claim or implication that the Senate Finance Committee tax cut is part of a larger plan that provides the majority of the surplus to strengthen Social Security is equally problematic. To ordinary Americans, such statements will suggest that the plan devotes the majority of the surplus to shoring up a Social Security program threatened with insolvency in 35 years. But that is not the case.


The "Increase" in Discretionary Spending

Perhaps most remarkable is the claim that the plan would increase discretionary spending. In making this claim, some policymakers have adopted a highly unusual way of measuring what constitutes an "increase." They are using as their "starting point" for measuring changes in discretionary spending over the next 10 years a level of discretionary spending that is $1 trillion below the FY 1999 level of discretionary spending, adjusted for inflation. Indeed, their starting point is $400 billion below the unrealistic level of discretionary spending that CBO assumes in its baseline; CBO has explained that because its baseline must follow the caps, the baseline assumes $595 billion in reductions in discretionary programs over the next 10 years, compared to FY 1999 levels for discretionary programs, adjusted for inflation. The starting point these policymakers are using is so low that if defense spending simply remained for the next 10 years at the FY 1999 level, adjusted for inflation, non-defense discretionary spending would have to be cut about 45 percent in real terms by 2009.

To make the argument that discretionary spending would "increase" under the Republican plan, these policymakers compare this draconian "starting point" to the level of discretionary spending reflected in the Congressional budget resolution. They find that the level in the budget resolution exceeds the level in their starting point. They then pronounce the plan as containing an "increase" in discretionary spending.

But CBO analyses show, in fact, that the budget resolution assumes a whopping $775 billion in reductions in discretionary programs over the next 10 years, compared to the FY 1999 levels adjusted for inflation. This is $180 billion more in cuts than the already-unrealistic CBO baseline assumes.

To get a sense of whether the discretionary spending levels in the budget resolution constitute increases in any meaningful sense, consider the following question. Suppose total resources for discretionary programs over the next 10 years were limited to the levels the Congressional budget resolution assumes. If Congress were simply to keep defense spending at today's level adjusted for inflation and to provide no real increase in defense spending — which seems unlikely — how would non-defense discretionary programs fare? The answer is that by 2009, overall expenditures for non-defense discretionary programs would have to be reduced by 36 percent below the FY 1999 level, adjusted for inflation. Moreover, if funding for areas such as highways, education, veterans' health and the National Institutes of Health were increased, or at least shielded from reductions, the cuts in the remaining parts of the non-defense discretionary budget would approach 50 percent.

Reductions of this magnitude are unthinkable. Yet this is the level of discretionary spending that some policymakers portray as constituting an "increase." It is an increase only when compared to the unique "starting point" they are using, which assumes nearly $1 trillion in discretionary program reductions over the next 10 years.


Providing Resources for Medicare

Closely tied to the claim that the plan increases discretionary spending is the claim that it leaves part of the non-Social Security surplus available to help shore up Medicare. This assertion rests on the extraordinary assumption that expenditures for discretionary programs will be cut $775 billion below today's levels, adjusted for inflation, a reduction that, as explained above, is $180 billion deeper than the unrealistic reductions CBO assumes in its baseline. Writing into the budget resolution the assumption that these $775 billion in discretionary program reductions will be made makes it appear, on paper, that some non-Social Security surplus funds will remain after the $792 billion tax cut is provided. It is these remaining funds that supposedly would be available to help shore up Medicaid and/or provide prescription drug assistance.

But the likelihood of discretionary cuts of this magnitude being enacted is essentially zero, as Congressional action virtually on a daily basis on the FY 1999 appropriations bills demonstrates. Under any realistic assumption regarding discretionary spending, a tax cut of this magnitude consumes more than 100 percent of the projected non-Social Security surplus, leaving no funds for Medicare and bringing back deficits in the non-Social Security budget.

End Notes:

1. James Horney recently joined the Center on Budget and Policy Priorities as a Senior Fellow. Until July 12, he directed the budget projections unit at the Congressional Budget Office, which coordinates CBO's estimates of expenditures, surpluses, and deficits. Robert Greenstein is the Center's executive director.