Tax Cut Time Bomb

by Adria Scharf

Dollars and Sense magazine, March/April 2004

President George W. Bush and Congress planted a time bomb in the federal budget, and they're about to light the fuse. The largest parts of the tax cuts passed in 2001 and 2003 didn't activate immediately, but were designed to kick in later this decade. If they go forward, the cuts will likely cripple or destroy the social programs that form the cornerstone of the federal welfare state. Even worse, the Bush administration is now pushing to make permanent virtually all of the 2001 and 2003 tax cuts, which were originally set to expire by 2010.

In 2001, Bush sought and won the largest income tax rollback in two decades-it reduced tax rates on the top four income brackets and gave advance refunds of $300 to $600 to 94 million taxpayers. In 2003, despite the growing budget deficit, the administration secured a second tax cut-the third largest in U.S. history. The 2003 package shrank dividend and capital gains taxes and accelerated the 2001 rate cut for top income brackets. Combined, the 2001 and 2003 tax cuts will cost at least $824.1 billion between 2001 and 2010, even if Republicans don't succeed in renewing the provisions scheduled to expire, or "sunset," according to Citizens for Tax Justice (CTJ). If the cuts are extended, CTJ estimates they will cost more than $1 trillion between 2004 and 2014, with over 80% of the revenue loss hitting after 2009.

Aside from their sheer size, the 2001 and 2003 packages were notable for a couple of reasons: First, their major provisions were deliberately scheduled to hit later in the decade. Republican congressional leaders delayed the largest cuts to protect the bills from filibuster and deflect attention from their long-term effects on the budget and inequality. Second, they were frontloaded with tiny morsels for the middle class and backloaded with enormous benefits for the top 1 %.

Over the next 75 years, the cost of extending the 2001 and 2003 tax cuts would amount to $5.9 trillion, or 1.1 % of gross domestic product (GDP), according to William G. Gale and Peter R. Orszag of the Brookings Institution. To put that figure into perspective, the expected costs of funding Social Security during that same period are just $3.8 trillion (or 0.7% of GDP). Gale and Orszag warn the new Bush budget plan will necessitate one of the following changes, or a "change of a similar magnitude," within the decade, and argue that even deeper cuts may be required:

* A 29% cut in Social Security benefits;

* A 70% cut in federal Medicaid benefits;

* A 49% cut in all domestic discretionary spending, or

* A 21 % increase in payroll taxes.

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