Studies Say Tax Cuts Now Will Bring Bigger Bill Later

Author: David Cay Johnston

Published: September 23, 2003

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."