The Administration strongly opposes the package of tax cut proposals contained in H.R. 2488. If a bill encompassing these proposals were to pass the Congress, the President would veto it.
The Nation's economy is strong because the Administration and the Congress have followed the proper economic course over the past six years. Because the Administration and the Congress have focused on reducing deficits, paying down debt held by the public, bringing down interest rates, investing in our people, and opening markets, there is $1.7 trillion less debt held by the public today than was forecast in 1993. These actions have contributed to greater productivity growth, low inflation, low unemployment, and broad-based growth in real wages. H.R. 2488 would reverse the fiscal discipline that has had such great benefits for the Nation's economy, raising several serious concerns.
The President has stated repeatedly that, before considering using projected surpluses to provide a tax cut, the long term solvency of Social Security and Medicare must be addressed. To date, the Congress has not acted on either of these issues.
The magnitude of the tax cuts in the bill, plus the associated debt service costs, would be greater than the size of all of the on-budget surpluses the Congressional Budget Office projects for the next ten years.
A tax cut of this size leaves none of these surpluses available for addressing the long-term solvency of Medicare -- which is currently projected by its Trustees to be insolvent by 2015, for addressing the financial needs of Social Security in the longer term, or for necessary funding for our national security and for education, health, and other domestic priorities.
The bill would cause the Nation to forgo the unique opportunity to eliminate completely the burden of the debt held by the public by 2015 as proposed by the President in the Mid-Session Review of the Budget. The elimination of this debt would have a beneficial effect on interest rates, investment, and the growth of the economy. Moreover, paying down debt is tantamount to cutting taxes. Each one-percentage point decline in interest rates would mean a cut of $200 to $250 billion in mortgage costs borne by American consumers over the next 10 years. If we do not erase the debt held by the public, our children and grandchildren will have to pay higher taxes to offset the higher Federal interest costs on this debt.
Since many of the major tax cuts are phased-in over a period of years, the cost of the proposed tax cuts would explode beyond the 10-year budget window. This would pose even greater risks for the future, just as the first wave of the baby boom generation is retiring. For example, the amount of the revenue loss from this package in 2015 alone is almost as large as the approximately $250 billion increase in the projected annual cost of Social Security between 2010 and 2015.
Budget projections for any period in the future are inherently uncertain. For example, in a study reviewing fiscal years 1988-98, CBO has reported that the average change between its estimates of annual deficits or surpluses five years into the future and the actual results was substantial. Projections of budget surpluses ten years into the future are even more uncertain. The prudent course of action in the face of these uncertainties is to avoid making financial commitments -- such as massive tax cuts -- that will be very difficult to reverse.
The bill would not meet the existing pay-as-you-go requirements of the Budget Act, which has helped provide the discipline necessary to bring us from an era of large and growing budget deficits to the potential for substantial surpluses. It would also require an automatic sequester of mandatory programs, including Medicare.
Finally, the Administration is concerned with the priorities and many of the specific elements of the tax initiatives in the bill. Too small a percentage of the tax cuts address the needs of middle-income working families. The Administration believes a better approach would be to include the high-priority, targeted tax incentives for middle-income families established in the President's budget -- helping them save for retirement, modernizing public schools for their children, and helping them care for their children or their relatives with long-term care needs.
The Administration looks forward to working with the Congress in the coming months to address the solvency of Medicare and Social Security, to meet critical national priorities, and to provide fiscally responsible tax relief targeted at the needs of working families.
H.R. 2488 would affect receipts; therefore, it is subject to the pay-as-you-go requirements of the Omnibus Budget Reconciliation Act of 1990. The Administration has not yet completed its scoring of the bill, but it is evident that the magnitude of the tax cut and the absence of significant offsets would cause a sequester of mandatory resources.