How Large Is the Available Budget Surplus?

March 14, 2001 02:38 PM | | Bookmark and Share

In January of 2001, the Congressional Budget Office increased its estimate of the ten-year federal budget surplus by almost $1 trillion. CBO’s latest revision brings the ten-year total projected surplus to $5.6 trillion. Congressional tax-cutters–and President Bush–see the new projections as an even more compelling argument for substantial tax cuts. On March 8, House Majority Leader Dick Armey declared that “over the next 10 years, American taxpayers will be overcharged by a staggering $5.6 trillion.” Yet the total amount of surplus revenues available for tax cuts is less than what these rosy figures would indicate. Here’s a brief summary of how the projected surplus really adds up in the wake of CBO’s latest projections–and how the Bush plan would affect the available surplus.

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How the Reagan Budget Deficits Became Today’s Surpluses

March 12, 2001 02:40 PM | | Bookmark and Share

In 1986, the federal government ran a budget deficit equal to a staggering 5.0% of the Gross Domestic Product. This year, fiscal 2001, the government is expected to run a surplus (including Social Security and Medicare) of 2.7% of the GDP. How did this astonishing turnaround occur? There are two primary reasons.

  • First of all, defense spending plummeted from 6.2% of the GDP in 1986 to 2.9% of the GDP this year. This, of course, reflects the end of the Cold War.
  • Second, personal and corporate income taxes rose from 9.3% of the GDP in 1986 to 12.2% of the GDP this year–largely because of tax increases on the highest earners enacted under Presidents George H.W. Bush in 1990 and Bill Clinton in 1993.
  • In conjunction with the resulting drop in interest payments on the national debt–from 3.1% of the GDP in 1986 to 2.0% this year–the defense cuts and tax increases explain almost all of the percent of the shift from massive deficits to surpluses since 1986.

Which goes to show that cutting spending and raising revenues was the only logical and effective way to balance the budget. Old-fashioned, but obvious, one might say.

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Tom DeLay’s Attempt to Rewrite History

March 9, 2001 02:41 PM | | Bookmark and Share

The Facts:
As everyone knows, under Ronald Reagan, the federal budget deficit ballooned–growing from 2.7% of the Gross Domestic Product in fiscal 1980 to 5.0% of the GDP in 1986. (The deficit actually peaked in 1983, at 6.0% of the GDP, before some of the Reagan policies began to be reversed.). Here’s how that happened:

Changes that lowered the deficit (as shares of GDP)–
 Domestic appropriations. Fiscal 1980: 4.7%. Fiscal 1986: 3.3%. Change: -1.4%
 All other non-defense programs, from fiscal 1980-86. Change: -0.2%
 Non-income-tax revenues (mostly payroll taxes), from fiscal 1980-86. Change: +0.5%
   Net deficit-lowering changes: -2.1%

Changes that increased the deficit (as shares of GDP)–
 Defense spending. Fiscal 1980: 4.9%. Fiscal 1986: 6.2%. Change: +1.3%
 Personal & corporate income taxes. Fiscal 1980: 11.3%. Fiscal 1986: 9.3%. Change: -2.0%
 Interest on the national debt. Fiscal 1980: 1.9%. Fiscal 1986: 3.1%. Change: +1.2%
    Net deficit-increasing changes: +4.4%

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New Estimates Show Cost of Bush Tax Plan Continues to Rise

March 8, 2001 11:42 AM | | Bookmark and Share

Click here to see this analysis in PDF format.

Newly revised estimates by the Congressional Joint Committee on Taxation show that the cost of the tax plan proposed by President George W. Bush would be substantially greater than the $1.6 trillion estimate generated last year. On March 1, the House Ways and Means Committee approved H.R.3, which would implement the income tax rate cuts proposed by Bush under a slightly accelerated schedule. A March 7 analysis by Citizens for Tax Justice, based in part on JCT’s analysis of H.R. 3, finds that the total ten-year cost of the Bush tax plan, as modified by H.R. 3, would be in excess of $2.4 trillion. In particular, CTJ’s analysis shows that:

How Much Does the Bush Tax Plan Cost?
Fiscal Years 2002-2011, $Billions
Bush May 2000 Estimate: $1,564
Add: Speeding up rate cuts, new CBO projections $148
Subtotal: $1,712
Add: Cost of fixing AMT (Bush-caused part only) $292
Subtotal: $2,004
Add: Interest payments $413
TOTAL COST: $2,417
  • H.R. 3’s accelerated income tax rate cuts, combined with revised estimates of economic growth since last May, increase the cost of the Bush plan by $150 billion over ten years. This brings the ten-year cost of the Bush plan’s provisions to over $1.7 trillion.
  • Because the Bush plan (like H.R. 3) reduces income tax rates without modifying the Alternative Minimum Tax (AMT), millions of additional taxpayers would be forced to pay the AMT when the plan is fully phased in, an outcome which all parties agree is unrealistic. According to JCT, adjusting the AMT to fix this problem would add almost $300 billion to the Bush plan’s cost. That brings the ten-year cost to just over $2.0 trillion.
  • The $2.0 trillion cost of the Bush plan reduces the amount of surplus revenues that can be devoted to reducing the federal debt by $2.0 trillion. This means that the federal government will pay an additional $413 billion in interest payments as a direct result of the Bush plan. Factoring in these additional interest payments brings the ten-year total cost of the Bush plan to $2.417 trillion.

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House GOP’s Version of Second Part of Bush Income Tax Cuts Analyzed

March 8, 2001 11:40 AM | | Bookmark and Share

Click here to see this analysis in PDF format.

The House of Representatives is set to vote next week on its version of the second part of the Bush income tax cuts. In combination with the Bush income tax rate reductions previously approved, the House tax measures put forward so far would provide 31.3 percent of their income tax cuts to the best-off one percent of all taxpayers. In contrast, only 6.3 percent of the tax cuts would go to the bottom 40 percent.

  • For the typical taxpayer, the House measures put forward so far would provide a tax cut of $544 a year (in today’s dollars), once the measures are fully in place in 2009.
  • For the poorest fifth of all taxpayers, the House bills offer an average annual tax cut of $50.
  • In contrast, for the wealthiest one percent of taxpayers, with average incomes of $1.1 million, the average annual tax cut under the House measures so far would be $28,608.

Earlier this month, the House approved HR 3, which would implement the President’s proposed reductions in income tax rates, including a cut in the top income tax rate from 39.6 percent to 33 percent and smaller reductions in other income tax rates. The House is now moving forward with HR 6, which would eventually double the $500 per child tax credit and partially address the “marriage penalty.” The House measures in HR 6 differ in detail from the President’s proposals in a number of ways, but the overall size and distribution of the House income tax cuts is almost identical to the income tax cuts proposed by the President.

According to the Joint Committee on Taxation, these first two stages of the Bush tax program would reduce revenues by $1.4 trillion over the next ten fiscal years. Still to come is the Bush proposal to repeal the estate tax on the wealthiest two percent, which has been previously estimated to reduce revenues by more than $300 billion over ten years. Counting some $400 billion in added interest on the national debt, that would bring the total cost of the Bush tax cut plan to about $2.1 trillion so far.

Both the Bush plan and the House bills would more than double the number of taxpayers subject to the Alternative Minimum Tax. The “AMT” effects would be somewhat more severe under the House bills, where one taxpayer in six would be subject to the AMT, compared to one out of seven under the Bush program.

Some 24 percent of taxpayers (31.2 million) would get no income tax cut from the House bills, compared to 26 percent (34.5 million) under the Bush program



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CTJ Analysis of Ways and Means Tax Proposals

March 2, 2001 11:44 AM | | Bookmark and Share

On March 1, the House Ways and Means Committee approved the biggest item in President George W. Bush’s tax plan, a sharp reduction in personal income tax rates. Republicans and Democrats on the Committee generally agreed on the size of the tax cuts for all but the richest taxpayers. But they sharply differed on the tax breaks for the best-off one percent, and thus on the overall size of the tax cut.

The GOP plan, which passed on a party-line vote, offers the top income group an average tax cut of more than $28,000 a year once the plan is fully in place. In contrast, the Democratic plan would limit its tax breaks for the top one percent to $737 a year.

Two Competing Income Tax Cuts
  Republicans Democrats
Income Group Average Tax Cut % of Tax Cut Average Tax Cut % of Tax Cut
Lowest 20% $ –41 1.3% $ –81 4.4%
Second 20% –168 5.3% –167 9.1%
Middle 20% –316 9.9% –289 15.7%
Fourth 20% –511 16.0% –531 28.8%
Next 15% –761 17.9% –781 31.8%
Next 4% –838 5.3% –763 8.3%
Top 1% –28,256 44.3% –737 2.0%
ALL $ –633 100.0% $ –366 100.0%
Bottom 60% $ –175 16.5% $ –179 29.1%
Top 10% –3,603 56.5% –768 20.8%

Under the Republican income tax plan, the wealthiest one percent would get 44.3 percent of the total income tax reductions. Under the Democratic plan, the top one percent would get two percent of the total tax breaks.

As a result, the GOP plan would total $958 billion over the next decade, according to the Joint Committee on Taxation. Including $258 billion in added interest on the national debt, the total cost would be $1.2 trillion over ten years. The Democrats’ alternative would cost only about half as much, even though the tax reductions for all but the top income group would be almost identical–or, in the case of the poorest taxpayers, larger–than under the GOP plan.

“The battle lines have been drawn,” said Robert S. McIntyre, director of Citizens for Tax Justice. “Both sides agree on tax cuts for middle-income families. But one side believes the wealthy are especially needy–apparently compared to almost any other public priority.”

The GOP income tax rate reductions are identical to those proposed by President Bush, with a portion of the cuts accelerated to tax year 2001. Under the plan, the top income tax rates, now 36 percent and 39.6 percent, would be reduced to 33 percent; the current 28 percent and 31 percent rates would be reduced to 25 percent; the current 15 percent rate would be continued; and a new bottom rate of 10 percent would apply to the first $12,000 in taxable income for couples and $6,000 for singles. The rate reductions would be phased in, and would take full effect in 2006.

The Democratic income tax cuts include a new 12% tax bracket, applicable to the first $20,000 in taxable income for couples, $16,000 for single parents and $10,000 for single taxpayers without children; an increase in the standard deduction for couples to double the single amount; and enhancements to the earned-income tax credit for moderate-income working families. The provisions would be phased in, and would be fully effective in 2003.

The GOP plan envisions a vast expansion in the number of taxpayers in the top fifth of the income distribution (but not the top one percent) who would have to pay the Alternative Minimum Tax. According to the Joint Committee on Taxation, by 2008, some 24 million taxpayers would pay the complicated “AMT” under the GOP plan. This result is very unlikely to be politically acceptable, but it reduces the apparent cost of the GOP income tax rate cuts by almost a quarter over ten years.

When fully in place, the Bush income tax rate cuts would represent about half the total cost of Bush’s proposed tax cuts, apparently leaving another trillion dollars or so in Bush tax cuts still awaiting congressional action.

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