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Bush Administration Tax Policy

Revenue and Budget Effects

William G. Gale, Peter Orszag

Published: October 04, 2004
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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

© TAX ANALYSTS. Reprinted with permission.

Note: This report is available in its entirety in the Portable Document Format (PDF).


I. Introduction

This article evaluates recent tax policies in light of the fiscal status of the federal government, and is the third article in a series that summarizes and evaluates tax policy in the Bush administration.1 Our analysis highlights the following points:

  • If the tax cuts are made permanent, the revenue loss will exceed $3.3 trillion (1.7 percent of gross domestic product) over the period 2001 to 2014. The net budget loss (including higher debt service payments due to increases in federal debt) would be almost $4.5 trillion (2.3 percent of GDP). These figures include the tax cuts enacted to date, the administration's proposal to make the 2001 and 2003 tax cuts permanent, and an adjustment to the alternative minimum tax that holds the number of AMT taxpayers the same under the tax cuts as it would have been under pre-Economic Growth and Tax Relief Reconciliation Act of 2001 law.
  • Because the tax cuts phase in over time, the averages above understate the relevant long-term magnitudes. In 2014, for example, the revenue loss from the policies noted above would be $373 billion (2 percent of GDP) and the budget costs would be $583 billion (3.2 percent of GDP). Over the longer term, the tax cuts would reduce revenue by 2 percent of GDP on an ongoing basis.
  • Even if the tax cuts are not made permanent, the federal government faces significant deficits over the next 10 years under plausible scenarios, and an unsustainable long-term budget path. Making the tax cuts permanent would significantly exacerbate both of those problems.
  • Tax cuts have to be financed. They are not simply a matter of returning unneeded or unused funds to taxpayers; instead, tax cuts represent a choice by current voters either to require future taxpayers to pay for current spending, or to cut such spending. Making the tax cuts permanent would require sizable reductions in spending or increases in other taxes. For example, to pay for the tax cuts in 2014 would require a 45 percent reduction in Social Security benefits, a 53 percent cut in Medicare benefits, or changes of a similar magnitude.
  • Over the next 75 years, the total costs of the tax cuts, if they are made permanent, are roughly the same order of magnitude of the actuarial shortfall in the Social Security and Medicare Part A trust funds. On a permanent basis, the tax cuts would cost significantly more than fixing the entire Social Security shortfall.
  • The claim that the tax cuts were needed in 2001 to avoid paying off all marketable federal debt was overstated, and did not justify the timing, magnitude, or structure of the original tax cuts. Even if it were valid then, the claim does not apply to considerations of whether the tax cuts should be made permanent, given the decline in the fiscal outlook since 2001.
  • Likewise, the claim that the tax cuts need to be made permanent to reduce uncertainty is flawed. The primary source of uncertainty in tax and spending programs is the underlying fiscal gap. By making the gap bigger, the tax cuts would likely increase policy uncertainty and instability, not reduce it.
  • Another claim, that the tax cuts were and are needed to control government spending, is examined in more detail in the next article in the series.

(After this article was originally submitted for publication, both Houses of Congress passed an extension of selected features of the 2001 and 2003 tax cuts. The bill is expected to be signed by President Bush. The bill features five-year extensions of the expanded 10 percent bracket, marriage penalty relief, and the $1,000 per-child tax credit. (See Gale and Orszag 2004a for descriptions of those provisions.) Those and other provisions would reduce revenues by $146 billion through 2009. Incorporating those provisions into the analysis below would slightly increase the cost of tax provisions enacted to date and slightly reduce the cost of extending all of the tax cuts. The total costs of the tax cuts enacted to date, plus the costs of extending them would remain approximately same.)

Section II provides estimates of the budget outlook and the revenue and budgetary effects of the tax cuts over a 10-year budget window. Section III examines similar issues over long-run horizons. Section IV discusses the key implications for making the tax cuts permanent. Section V discusses the key implications for the original tax cuts.

Notes from this section

1 The first two articles provide background information and distributional analysis (Gale and Orszag 2004a, 2004b).


Note: This report is available in its entirety in the Portable Document Format (PDF).