Winners, losers/Who pays for Bush tax cuts?

Published: June 8, 2004

Since his first days as a presidential candidate, George W. Bush has been remarkably cavalier about how to pay for his massive program of tax cuts.

In early 2000 he said federal surpluses would suffice to pay for new spending and huge tax reductions, a prediction that proved to be wrong just one year later. Last year, his cabinet secretaries toured the nation promising that the economy would grow its way out of deficits. But today not even the White House forecasts show any such thing.

This year Bush pledged to cut the federal deficit in half by 2009 -- omitting the fact that budget deficits would start growing again the very next year.

Now reality is sinking in, and it's ugly. In a major scoop last month, the Washington Post reported that the White House has circulated a memo ordering all federal agencies to prepare substantial budget cuts for fiscal year 2006. The Department of Veterans Affairs would lose the entire increase it's getting this year, and more, leaving it with less money than it had last year. The Education Department would lose almost every penny of this year's increase to pay for No Child Left Behind. The National Institutes of Health, a Bush priority, would get less money in 2006 than in 2005. Funding for Head Start and infant nutrition also would take major hits.

Even this does not present the full picture, for the cuts spelled out in the White House budget memo won't nearly suffice to close the government's projected budget gap.

So a trio of respected Washington think tanks decided to do the arithmetic themselves. Their report, "The Ultimate Burden of the Tax Cuts," was released last week by the Brookings Institution, the Urban Institute and the Center on Budget and Policy Priorities. Bottom line: Four out of five American households will be worse off over the coming decade when you count both the tax cuts they receive and the government services they will lose. Only the top fifth of households -- those earning more than $76,000 annually -- will be net winners from the Bush program. In other words, tax cuts that already were heavily weighted to the affluent turn out even worse when you consider how they will be paid for.

The think-tank economists started out by totaling the cost, $3.9 trillion, of two major tax cuts proposed by Bush and passed by Congress in 2001 and 2003. They ask what it would cost to pay for those tax cuts, either through cuts in federal services, such as college loans and job training, or through a combination of spending cuts and other tax increases.

In the first scenario, a household in the middle of the income distribution will get an annual tax cut of $652 from the Bush plan but will lose $1,520 in government services, for a net loss of $869 per year. A taxpayer in the bottom fifth of the income distribution gets $19 in tax cuts per year, while losing $1,520 in federal services, for a net loss of $1,502. Only households in the top fifth of the income distribution come out net winners, with net income gains of a whopping $3,934 per year.

Selling his tax cuts on the speaking circuit, Bush has said time and again, "It's your money," an irresistibly appealing line. That was true when Washington was running budget surpluses. But now that Americans have to pay for those tax cuts -- either by forgoing education, veterans' benefits, scientific research and other federal services, or by passing a huge federal debt to their children -- the appeal is not so irresistible.