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CONGRESS' COSTLY TAX CUTS WILL DRAIN THE
SURPLUS TO PROVIDE BENEFITS THAT COULD BE WIPED OUT BY HIGHER INTEREST
RATES
July 26, 2000 |
The tax cuts passed by the 106th Congress would threaten our
fiscal discipline, and could plunge the nation back into on-budget deficit
(according to OMB's estimates) or use the entire on-budget surplus (based
on CBO's more optimistic projections). Either way, this approach leaves no
money for key priorities like a Medicare prescription drug benefit. Moreover,
the benefits of the tax cut for middle-income families could be more than wiped
out by only a small increase in interest rates. In contrast, President Clinton
has proposed targeted tax cuts that provide substantially more tax relief at
less than half the total cost of the Congressional proposals. The
President's approach maintains the same fiscal discipline that has
contributed to our current prosperity, prepares for the future by strengthening
Social Security and Medicare, invests in key priorities like a Medicare
prescription drug benefit, and pays down the debt by 2012.
HIGHLIGHTS
- The tax cuts passed by Congress this year would cost more than
$700 billion over 10 years; with interest they would drain over $900 billion
from the surplus.
- If the Republican Congress is still intent, either this year or
next, on enacting tax cuts passed last year, including across-the-board
reductions, the total cost of its tax cuts would be more than $1.4 trillion;
with interest they would drain $1.8 trillion from the surplus. This would
use the entire on-budget surplus, even according to the more optimistic
projections by the Congressional Budget Office.
- The major tax cuts passed by the House Ways and Means Committee
this year would provide an average tax cut of $220 for a middle-class family
(the middle fifth of the income distribution). If interest rates rose even 1/3
of a percentage point, a typical family with a $100,000 mortgage would see its
mortgage payments go up $270, more than wiping out the benefits of the tax
cut.
- Under the President's fiscally responsible plan, the tax
cuts for middle-class families are substantially larger than under the
Republican plan. The middle fifth of the income distribution gets an average
tax cut of $371 annually from the major provisions of the President's $263
billion package, at less than half the cost of the Republican bills, and thus
much less risk of higher interest rates.
- An analysis by Goldman Sachs found that interest rates today
are 2 percentage points lower as a result of going from a record $290 billion
deficit in 1992 to a record $124 billion surplus in 1999. Lower interest rates
have resulted in annual savings for families of $2,000 on a typical home
mortgage, $200 on a typical student loan, and $200 on typical car
payments.
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Tax Cuts Passed by the Republican Congress This Year Would Cost
More Than $700 Billion; With Interest Costs They Drain More than $900 Billion
From the Surplus
Instead of passing one large tax bill, this year the Republican Congress
is passing its tax cuts piece by piece. But the economic and budgetary effect
is the same. According to the new analysis by OMB, these tax cuts now cost more
than $700 billion over 10 years. Accounting for additional debt service, the
total drain on the surplus is over $900 billion:
|
TAX CUTS PASSED BY CONGRESS THIS YEAR
($billions, 2001-10) |
|
|
|
|
Cost |
Passed By |
|
|
|
Marriage Penalty |
$2931 |
House and Senate |
Estate Tax Repeal |
$105 |
House and Senate |
Small Business / Minimum Wage |
$123 |
House and Senate2 |
Social Security Benefits Tax Reduction |
$116 |
House Ways & Means and Senate3 |
Communications Excise Tax Repeal |
$51 |
House and Senate3 |
Pension and IRA Limit Increases |
$52 |
House |
Affordable Education |
$21 |
House Ways & Means and Senate |
Patients Bill of Rights4 |
$69 |
House and Senate |
Taxpayer Bill of Rights |
$7 |
House |
Trade and Development |
$4 |
Enacted |
|
|
|
Total Cost (eliminating duplication) |
$712 |
|
Added Interest |
$201 |
|
Total Drain on Surplus |
$913 |
|
|
|
|
Source: Cost estimates of individual bills are from
Congress' Joint Committee on Taxation and total cost is based on an
analysis by the Office of Management and Budget. The total cost excludes
duplicate provisions but does not take into account possible interactions of
the different provisions.
1 The passed bill sunsets after 2004 for procedural reasons. This
estimate assumes the tax cut is permanent.
2 Senate version is $103 billion.
3 Passed as an amendment to estate tax repeal in the Senate and then
stripped from the bill before final passage.
4 Passed in 1999 and currently in Conference. Senate version is $39
billion.
The Total Tax Cuts Passed By the 106th Congress Would
Use $1.8 Trillion of the Surplus At Least the Entire On-budget Surplus
Over 10 Years
The Republicans have passed many of the pieces of the $792 billion tax
bill the President vetoed last year; and they describe the bills they have
passed this year as just a "down payment" on their ultimate goals. They still
have remaining many costly elements of last year's bill, including
across-the-board rate reductions. If the Republican Congress has not reversed
its support for passing these tax cuts this year or next the
total drain on the surplus from 2001-10 would be $1.8 trillion. This
substantially exceeds OMB's projection of a $1.47 trillion on-budget
surplus from 2001-10, leaving an on-budget deficit of over $300 billion. It
uses up the entire $1.81 trillion on-budget surplus in the Congressional Budget
Office's more optimistic projections. This would risk our fiscal
discipline and leave nothing for other priorities like a voluntary Medicare
prescription drug benefit, paying down the debt by 2012, providing targeted tax
cuts to help working American families with the costs of college, long-term
care, child care, and raising larger families, and strengthening Social
Security and Medicare. (These on-budget surplus estimates exclude Medicare
surpluses, something that was proposed by the Vice President, endorsed by the
President, and agreed to in principle by the Republican Congress.)
|
TOTAL TAX CUTS PASSED BY THE 106TH
CONGRESS ($billions, 2001-10) |
|
|
|
|
Cost |
Passed By |
|
|
|
Tax Cuts Passed This Year |
$712 |
|
|
|
|
Some of the Tax Cuts Passed Last Year |
|
|
Reduction in Tax Rates |
$490 |
House and Senate1 |
Individual Alternative Minimum Tax |
$1152 |
Conference Agreement |
Corporate Alternative Minimum Tax |
$14 |
House and Senate1 |
Capital Gains for Individuals |
$57 |
House and Senate1 |
Capital Gains for Corporations |
$8 |
House and Senate1 |
Interest Deduction on Worldwide Basis |
$29 |
House and Senate1 |
Extend R&E Tax Credit |
$183 |
House and Senate |
Extend exemption for Subpart F AFI |
$6 |
Conference Agreement |
|
|
|
Total Cost (eliminating duplication) |
$1,447 |
|
Added Interest |
$349 |
|
Total Drain on Surplus |
$1,796 |
|
|
|
|
Source: Cost estimates of individual bills are from
Congress' Joint Committee on Taxation and total cost is based on an
analysis by the Office of Management and Budget. The total cost excludes
duplicate provisions but does not take into account possible interactions of
the different provisions.
1 Cost estimate is from H.R. 2488 as passed by the House.
2 Excludes the cost of the provisions passed as part of this year's
marriage penalty bill.
3 Cost estimate is from H.R. 2488 as passed by the Senate excluding the
cost of the 5-year extension enacted in 1999. The Senate passed this provision
again this year as an amendment to estate tax repeal, but then stripped it
before final passage.
The Benefits Of Republican Tax Cuts For Typical Families Could Be
Wiped Out By Higher Payments On Everything From Mortgages to Student
Loans
- An analysis by the Department of the Treasury of the major provisions
passed by House Ways and Means this year (estate tax repeal, marriage penalty,
limit increases for pensions and IRAs, Social Security benefit taxation
reduction, and other tax cuts) found that families in the middle quintile of
the income distribution got an average tax cut of $220.
- If a reversal of our fiscal discipline were to drive mortgage rates
up by even 1/3 of a percentage point, then a typical family with a $100,000
mortgage would see its annual payments go up by $270 more than wiping
out the benefits of the tax cut.
- According to the analysis by the Department of the Treasury, the top
1 percent of taxpayers get about the same total dollar benefits from the major
tax cuts passed by House Ways and Means this year as the bottom 80 percent of
taxpayers combined.
President Clinton's Targeted Tax Cuts Would Provide More For
Most Families At a Much Smaller Total Cost
President Clinton has proposed tax cuts totaling $263 billion over 10
years. This fiscally responsible tax package would deliver more benefits to
more families than the much larger Republican tax package:
- The major tax cuts proposed by the President would provide an average
tax break of $371 annually for a person in the middle quintile of the income
distribution that is substantially more than the $220 annual tax break
they would get from the tax cuts passed by House Ways and Means, which cost
more than twice as much in total revenue.
- 66.4 percent of the benefits of the tax cuts proposed by the
President go to the middle 60 percent of Americans; in contrast, about 25
percent of benefits of the tax cuts passed by House Ways and Means go to this
group.
- President Clinton's tax cut proposals build on a successful
strategy that has resulted in the lowest total Federal tax rates on typical
families in over two decades. The tax cuts signed into law by the President in
1993 and 1997 for example, the expanded Earned Income Tax Credit, the
$500 child tax credit, the $1,500 HOPE Scholarship Tax Credit, and expanded
IRAs have reduced taxes for American families. The total Federal tax
rate for the median-income family of four has dropped from 24.5 percent in 1992
to 22.8 percent in 1999 that's the lowest tax rate since 1978. For
families at one-half the median income, the effective Federal tax rate has been
slashed from 19.8 percent in 1992 to 14.1 percent in 1999 that's
the lowest tax rate since 1968.
What Fiscal Discipline Means For American Families and the
American Economy
- Goldman Sachs credits deficit and debt reduction with lowering
interest rates by 2 percentage points. "According to the model, the swing
in the federal budget position from a deficit of $290 billion in 1992 to a
surplus of $124 billion in 1999 roughly matching the improvement in the
general government position has lowered equilibrium bond yields by a
full 200 basis points." [Goldman Sachs, "GSWIRE Undistorted by the Budget
Surplus," April 14, 2000. One "basis point" is 1/100 of a percentage
point.]
- Lower interest rates have already cut mortgage payments by $2,000
for families with a $100,000 mortgage. Because of deficit and debt
reduction already achieved, a family taking out a home mortgage of $100,000
expects to save roughly $2,000 per year in mortgage payments. This has
helped raise the homeownership rate from 64.0 percent in 1993 to 67.1 percent
in the first quarter of 2000 the highest rate on record.
- Lower interest rates cut car payments by $200 annually for
families taking out a typical car loan.
- Lower interest rates cut student loan payments by $200 annually
for a person with a typical student loan.
- Each 1 percentage point reduction in mortgage rates reduces
mortgage costs by $250 billion over ten years. According to calculations by
the Department of the Treasury, a percentage point reduction in interest rates
saves families $250 billion over 10 years on mortgage payments.
- Lower debt will help maintain strong economic growth. With the
government no longer draining resources out of capital markets, businesses have
more funds for productive investment. This has helped to fuel a 12.5 percent
real annual increase in productive equipment and software investment since 1993
seven consecutive years of double-digit growth and the strongest period
of growth on record. This compares to 4.7 percent annual growth from 1981-92, a
period that saw the debt held by the public quadruple.
- Rising investment has contributed to a pickup in productivity
growth. Non-farm business productivity has grown at a 2.6 percent average
annual rate for the last five years, and a 3.2 percent average annual rate for
the last three years. This is more than double the 1.4 percent annual growth
from the 1973 through 1990.
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