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The Bush Tax Cuts: What spending and revenue measures would pay for making them permanent?

The Congressional Budget Office (CBO) estimates that the Bush tax cuts, if extended beyond 2010, and assuming indexation of the alternative minimum tax (AMT), will reduce tax revenue in 2017 by $444 billion. Paying for these cuts would require spending cuts or other revenue increases that are well beyond the range of those currently being proposed in any public discussion. In other words, no politically plausible way is in evidence by which the tax cuts could be financed.

  • If the tax cuts were financed in 2017 (the last year of the current ten-year budget window) by an across-the-board cut in spending on everything the federal government does, from defense to national parks to Social Security and Medicare, all federal spending would have to be reduced by 12 percent, relative to the CBO’s projected baseline, to pay for the Bush tax cuts and AMT indexation (see table).
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  • If instead spending cuts were limited to nondefense discretionary spending (a measure that includes all government functions other than Social Security, Medicare, Medicaid, defense, homeland security, and net interest payments), a 46 percent cut relative to the CBO baseline would be required.
  • If the cuts were instead targeted in a single specific spending area, either a 43 percent cut in Social Security benefits or a 53 percent cut in Medicare benefits would be required. Except for defense, no other area of federal spending, including the federal component of the Medicaid program, is large enough that even its total elimination would make up for the cost of the tax cuts.
  • If, instead of spending cuts, the tax cuts were paid for by increases in other taxes, it would require, as examples, a 33 percent increase in payroll taxes or a 119 percent increase in corporate tax revenue.
 
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