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
Devoting the Majority of the Surplus to Help Social Security
The "Increase" in Discretionary Spending
Some policymakers are arguing that the proposed $792 billion tax cut over 10 years is balanced and responsible because:
- the tax cut equals only 25 percent of projected surpluses over the 10-year period;
- a much larger share of the surplus would be used to help preserve Social Security; and
- part of the surplus would be available for "new spending," including increases in discretionary spending and funds to help shore up Medicare.
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.
- If a $792 billion tax cut is provided, less of the surplus will be used to pay down debt than CBO assumed when it made its budget projections. As a result, the debt will be larger than CBO assumed and interest payments on the debt consequently will be greater. Specifically, using CBO assumptions, the Senate tax cut bill would result in $141 billion more in interest payments on the debt than CBO assumed. The true cost of the tax cut over the next 10 years thus is $932 billion $792 billion for the tax cuts themselves, plus the $141 billion for the increased interest payments the tax cuts would trigger.
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.)
- This $932 billion is about one-third of the unified budget surplus over the next 10 years. But the unified budget surplus is the wrong measure to use in determining how much of the available surplus the tax cut would consume. Some $1.9 trillion of the projected unified budget surplus consists simply of reserves that are building in Social Security, all of which will be needed when the baby boomers retire; this is not extra money that has no claim on it. When the Social Security surplus is put to the side, as it should be, the $932 billion that the tax cut and related interest payments would cost would consume 94 percent of the non-Social Security surplus.
- Moreover, even the 94 percent figure understates the degree to which the tax cut would consume the available surplus. As CBO has explained, its projections of a non-Social Security surplus of close to $1 trillion ($996 billion) assume that Congress will, over the next 10 years, cut discretionary programs $595 billion below today's levels adjusted for inflation. CBO assumes Congress will adhere religiously to the tight discretionary caps for the next three years and then hold discretionary spending from 2003 through 2009 to the level of the 2002 cap, adjusted only for inflation. As virtually all of Washington knows, however, the idea that Congress will cut discretionary spending enough so that expenditures do not exceed the caps is a fantasy. In the past few weeks alone, the appropriations committees have adopted a plethora of gimmicks to enable them to set spending for appropriated programs at levels billions of dollars above the cap.
The CBO surplus projection also rests on the unrealistic assumption that there will be no emergency spending for the next 10 years no hurricanes, floods, tornadoes, or international crisis, and no creative misuses of emergency spending rules such as those Congress is now employing.
As a result, the projected non-Social Security surplus is much smaller than $996 billion if more realistic assumptions are used in these areas. In fact, if the more realistic assumption is made that non-emergency discretionary spending will remain at today's levels, adjusted for inflation, and that emergency spending will remain at its average level for 1991-1998 (excluding appropriations for Desert Storm and last year's emergency spending binge), then the large majority of the non-Social Security surplus evaporates. If these more realistic assumptions are made and CBO assumptions are used in other areas, the $792 billion tax cut is seen to consume far more than 100 percent of the non-Social Security surplus and to result in $800 billion in non-Social Security deficits over the next 10 years.
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.
- With the baby boomers in their peak earning years, the Social Security system currently is running annual surpluses. These surpluses are building Social Security's reserves. But all of these reserves will be drawn down when the boomers retire in large numbers. The Social Security Trustees project that the reserves will be exhausted and the system will become insolvent in 2034.
- When tax-cut supporters say they are devoting the majority of the surplus to Social Security, all they mean is that Social Security would keep the surpluses it already is scheduled to receive. The Trustees already count all of these surpluses when they project that the system will become insolvent in 2034.
- Unlike the Clinton Administration proposal, the Republican plan does not provide any additional funds for Social Security. Under it, Social Security still would become insolvent in 2034. The solvency of the system would not be improved.
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.
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.