Brookings Economists Estimate Making Tax Cuts Permanent, Fixing AMT Would Add $3 Trillion To Deficit

Author: White House Bulletin

Published: January 26, 2004

In his State of The Union Address, President Bush called once again for making the 2001, 2002 and 2003 tax cuts permanent. When all three sets of tax cuts were passed, they included sunset provisions that would have automatically terminated them by 2010. In a new analysis, Brookings institution economists William Gale and Pete Orszag estimate that making the tax cut measures permanent and reforming the Alternative Minimum Tax (AMT) to "stop it from taking over the tax system" would reduce revenues by $2.5 trillion and increase the deficit by $3 trillion through 2014. They estimate that 44 million people would face the alternative minimum tax in 2014 if AMT isn't reformed, a situation they say Congress can't afford to allow to happen.

   Their analysis notes:

-- "To avoid having the AMT take over the tax system, legislators will need to fix the AMT in one way or another. ... A natural AMT reform to consider is to extend expiring AMT provisions, index the AMT for inflation, and allow dependent exemptions to be counted against the AMT, moving all but 5 million households off the AMT by 2014 (compared to 3 million AMT payers today). This policy alone would reduce revenues by $452 billion over the next decade, and raise the deficit (including interest payments) by $572 billion. In 2014, it would reduce revenues by $52 billion, assuming the Bush tax cuts were not extended."

-- "Including both the cost of the AMT reform and the extension of all of the expiring Bush tax cut provisions, the revenue loss would be $2.5 trillion over the next decade and the total increase in the deficit (counting interest payments) would be $3.0 trillion. In 2014 alone, the revenue loss would be $487 billion, or 2.6 percent of GDP."

-- "If the tax cuts were made permanent, filers with income above $1 million would see a 5.7 percent increase in their after-tax income, whereas filers with income below $50,000 would see just a 2.2 percent average increase in their after-tax income. (These figures do not include the estate tax repeal, which is also quite regressive.)"

-- "The top 1 percent would receive 27 percent of the tax cuts provided by making the expiring provisions permanent, even though that group pays only 21 percent of federal taxes. Taxpayers with income above $1 million would receive average annual tax cuts of $107,000 (again, this does not include the estate tax). This is higher than the income of about 86 percent of tax filing units."