Permanent tax cuts unsound policy
In the spring of 2001, Congress passed a large tax cut. That same year two other critical things happened the economy went into recession, and there was the Sept. 11 tragedy. Defense and homeland security costs increased sharply (and have continued to rise), and deficits replaced the budget surplus. But the tax cutting didn't stop, and another large tax cut was enacted in 2003.
Eighty-eight percent of the costs that resulted from legislation enacted since January 2001 are attributable either to tax cuts or to increases in defense and homeland security spending. Only 9 percent resulted from expansions of entitlement programs, such as temporary federal unemployment benefits provided during the recession and the 2002 farm bill. This does not reflect the costs of the Medicare prescription drug bill since the new drug benefit doesn't take effect until 2006.
The tax cuts are still not fully in effect and won't reach their full dimensions until 2010. When fully implemented, the annual cost of the tax cuts just for the wealthiest 1 percent of taxpayers will exceed everything the federal government spends on education. The annual cost of the entire tax cut will equal everything the federal government spends on all of the following programs combined: Housing and Urban Development, food assistance, national parks, environmental protection, transportation, veterans' programs, agriculture, the State Department, and the Department of Homeland Security.
All federal tax revenues have fallen to their lowest level since 1959, measured as a share of the economy. Income tax revenues from individuals have also fallen to their lowest level, as a share of the economy, since 1951. Medicare, Medicaid, most federal aid to education and most child care and environmental programs did not exist in 1959. Nor did many key anti-poverty programs such as food stamps. And Social Security was less comprehensive at that time, leaving more people uncovered and in poverty. In fact, due in large part to Social Security, the elderly poverty rate has declined from 35.2 percent in 1959 to 10.2 percent in 2003.
There is a great deal of discussion that significant changes in Social Security are needed now because of the 75-year shortfall in funding in the program. Yet, the cost of the tax cuts, if made permanent, is more than three times the size of the Social Security shortfall. This does not mean that policymakers should avoid Social Security reform. Nevertheless, this comparison helps to illustrate why the tax cuts are unaffordable, and why making them permanent does not represent sound policy. It also shows how distorted the claims are that the tax cuts were moderate and reasonable while the Social Security shortfall is massive. In fact, the Social Security shortfall is modest compared to the size of the tax cuts.
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