Studies Say Tax Cuts Now Will Bring Bigger Bill Later

[MTAtech]

September 23, 2003
Studies Say Tax Cuts Now Will Bring Bigger Bill Later
By DAVID CAY JOHNSTON


President Bush's tax cuts will put a trillion dollars in people's pockets over six years, but because the government is spending far more than it is taking in, the president's policies also mean that Americans face a much larger future tax bill — or equally large cuts in government spending — to balance the government's books.

For each dollar of tax cuts, federal borrowing to finance the tax cuts, the war on terror and routine government operations will total $3.60 over six years, Congressional Budget Office data show.

From 2001 to 2006, Americans will get tax cuts that average $3,593 a person, while the per capita share of the national debt will increase by $13,000 from 2002 through 2007. About a fourth of this year's record budget deficit, estimated at $480 billion, will finance tax cuts. Money the government borrows must be repaid eventually through either future taxes or cuts in spending, although repayment can be deferred forever through more borrowing.

As the amount borrowed grows, however, the mounting interest expense squeezes out financing for purposes unless tax revenue grows even faster, just as mortgaging a home to pay for vacations and groceries can eventually result in such large monthly interest expenses that there is no cash to pay for improvements, repairs or electricity.

"The government is basically borrowing $1,000 in your name and then handing you $250 of it," said Robert McIntyre, director of Citizens for Tax Justice, a labor-backed research group in Washington. "The net effect is to leave you deeper and deeper in debt."

The costs and benefits of the cut-taxes-and-borrow policy vary widely depending on how much one makes, according to Citizens for Tax Justice. The group's tax calculations are widely respected, even by those who disagree with its assertions that the tax system favors the rich.

In a report to be released this morning, Citizens for Tax Justice estimates that the 26 million taxpayers on the middle rungs of the income ladder, those making $28,000 to $45,000, are especially hard hit by federal borrowing.

Each dollar of tax savings for this group is accompanied by $6.55 of increased federal debt, it estimates. The debt estimates are adjusted for each income group's share of income and population.

In 2007, interest alone on the additional $24,859 of federal debt owed by eachfamily in this group will be more than $1,200, which is more than twice their average $578 of tax savings in 2006.

Only the top 1 percent income group comes out ahead, the analysis found.

Each dollar of tax cuts for the top 1 percent is offset by just 77 cents of added federal debt. For this group, the tax cuts over six years are worth $236,266 a person on average, while the share of the extra federal debt averages $182,725.

Two tax experts at the Heritage Foundation, which has its own widely respected program to model the tax system, said that even though the tax cuts were being financed with borrowed money, it expected the long-term effect would be a significant increase in individual income.

William W. Beach, who developed the Heritage tax model, said his calculations showed that for each dollar of federal debt used to finance tax cuts from 2003 to 2013, disposable income would rise by $4.14. He said his model assumed that the borrowing to finance tax cuts, though not other government operations, would stimulate investment and create jobs.

Both Daniel J. Mitchell, a Heritage tax policy expert, and William G. Gale, a Brookings Institution economist, said that how borrowed money was used was crucial.

Mr. Mitchell said that "if you go into debt to win World War II it is a good thing; if you are going into debt to finance a trip to Las Vegas to blow your pension fund that is a bad purpose."

"The current borrowing is good because we will get long-term investment."

Mr. Gale used the same analogy, but came to a different conclusion. Federal debt "skyrocketed in World War II, but everybody thinks it was for a good reason," he said.

"Now federal debt is rising again and a significant chunk is to finance tax cuts for the very wealthiest families, which in my view is not a good reason."



Copyright 2003 The New York Times Company

[J-Excel]

Makes sense to me. You can't keep cutting taxes deeply and expect the government to operate sufficiently. Taxes are like the government's paycheck. Cutting taxes is like your employer cutting your pay, telling you to live more efficiently and that pay cuts will make the company stronger so that it will create more jobs. I'm all for curbing wasteful spending but deep tax cuts are curbing useful spending as well. I see deep tax cuts as a Republican tool to buy votes. Nothing more.

[shahani]

Tax cuts, used wisely, can give an impetus to a slagging economy. Providing other elements of the economy are doing OK.

It is one tool.

But, if used for political reasons, it can be disastrous for the future.

The future belondgs to our children and Bush just mortgaged it to finance a war and buy votes. People are happy today to receive some spending money out of the blue.

But they will not be happy when the problems associated with huge deficits kick in.


There is no upside to this situation.

[ben-the-slacker]

Originally posted by shahani
There is no upside to this situation.

Sure there is. It'll be a good reason for further Bush-bashings.

Seriously, who do you think will bear the burden of all this when it comes around? Surely not Mr. Gates and his 1337 club of the rich and the famous.

[daveleau]

It didn't happen with Reagan. Reagan cut taxes and the deficit disappeared the moment Clinton came into office. Even Clinton cut taxes.

The problem with the deficit is not how much tax we collect, but how much we spend. We need to prune the problemed spending, like Welfare (going to many who don't need it- don't cut benefits to those that do need it), Social Security (we have thousands of Mexican citizens collecting SS), and pork barrel spending (the govt spent 11 million to study the lifestyle of gay indians...wtf?). Our priorities for the federal government are as they have always been: security of the people and then the economy. Military cuts are the worst that can happen because military and intelligence cuts literally caused the 3000 dead on 9/11. Keep the military funds where they are (or boost them) and cut the unnecessary pork barrel projects. And most of all, cut taxes so that the economy will be stimulated. Reagan did it with superb success and Kennedy did it with pretty good success as well. No other economic model has shown any promise.

[MTAtech]

Some people suggest that the neocons are intentionally bankrupting the federal government so that there isn't any money available for the social programs that they hate.

[shahani]

It didn't happen with Reagan. Reagan cut taxes and the deficit disappeared the moment Clinton came into office.

Y'know what? Maybe if history rep....

Nah, forget it.

[MTAtech]

Ok, if the problem is that we spend too much, where would you cut?

Of the $ 2 trillion we spend, the bulk is Defense, Social Security and Medicare and Interest on the debt. After that, there is only a couple of hundred billion left. The budget deficit is about $500B.

Actually, Reagan had to abandon his tax-cuts in his later years. In addition, most of the tax revenue increase was from payroll and SS taxes.
http://www.house.gov/apps/list/press...gan041601.html

[osprey4]

Originally posted by MTAtech
Actually, Reagan had to abandon his tax-cuts in his later years. In addition, most of the tax revenue increase was from payroll and SS taxes.

Abandon? Reagan completely revamped the tax structure (the basics of which remain intact to this day).

And of course tax revenue increased due to payroll taxes. That's the whole idea behind tax cuts!!! Cut taxes, spur growth, increase earnings and revenue. DUH!!

[MTAtech]

No, no, no. This is only true if 'revamp' means 'raise.' You are giving the impression that Reagan lowered taxes and more revenue came in. That is just not true. At first, Reagan lowered taxes and less money came in. 'The Reagan Administration and the split Congress also raised taxes in 1982, 1984, and 1986, although back then they were called "revenue enhancements," not tax increases. '
Check the above link.
"In fact, almost half of the increased revenues of the Reagan era came from Social Security and Medicare payroll taxes, which were increased by President Reagan and Congress in 1983."


In addition, Reagan 'revamped' the several retirement systems that made workers pay into the systems who never paid before. Then, the gov't raided the systems' surpluses and replaced them with gov't debt to pay for current expenditures.

I remember the tax increases of 1986. Income averaging was elliminated as was deductability of interest except mortgage interest.