|-------------------------------------------------------------------------|
| |
| CONGRESS? COSTLY TAX CUTS WILL DRAIN THE SURPLUS TO PROVIDE BENEFITS |
| THAT COULD BE WIPED OUT BY HIGHER INTEREST RATES |
| July 26, 2000 |
| |
|-------------------------------------------------------------------------|
The tax cuts passed by the 106th Congress would threaten our fiscal
discipline, and could plunge the nation back into on-budget deficit
(according to OMB?s estimates) or use the entire on-budget surplus (based
on CBO?s less conservative projections). Either way, this approach leaves
no money for key priorities like a Medicare prescription drug benefit.
Moreover, the benefits of the tax cut for middle-income families could be
wiped out by only a small increase in interest rates.
In contrast, President Clinton has proposed targeted tax cuts that provide
substantially more tax relief at less than half the total cost of the
Congressional proposals. The President?s approach maintains the fiscal
discipline that has contributed to our current prosperity, prepares for the
future by strengthening Social Security and Medicare, invests in key
priorities like a Medicare prescription drug benefit, and pays down the
debt by 2012.
|-------------------------------------------------------------------------|
| |
| |
| HIGHLIGHTS |
| |
| ? The tax cuts passed by Congress this year would cost more than |
| $700 billion over 10 years; with interest, they would drain over $900 |
| billion from the surplus. |
| |
| ? If the Republican Congress is still intent on enacting tax cuts |
| passed last year, including across-the-board reductions, the total cost |
| of its tax cuts would be more than $1.4 trillion; with interest, they |
| would drain $1.8 trillion from the surplus. This would use the entire |
| on-budget surplus, even according to the more optimistic projections by |
| the Congressional Budget Office. |
| |
| ? The major tax cuts passed by the House Ways and Means Committee |
| this year would provide an average tax cut of $220 for a middle-class |
| family (the middle fifth of the income distribution). If interest |
| rates rose even 1/3 of a percentage point, a typical family with a |
| $100,000 mortgage would see its mortgage payments go up $270, more than |
| wiping out the benefits of the tax cut. |
| |
| ? Under the President?s fiscally responsible plan, the tax cuts for |
| middle-class families are substantially larger than under the |
| Republican plan. The middle fifth of the income distribution gets an |
| average tax cut of $371 annually from the major provisions of the |
| President?s $263 billion package, at less than half the cost of the |
| Republican bills, and thus much less risk of higher interest rates. |
| |
| ? An analysis by Goldman Sachs found that interest rates today are 2 |
| percentage points lower as a result of going from a record $290 billion |
| deficit in 1992 to a record $124 billion surplus in 1999. Lower |
| interest rates have resulted in annual savings for families of $2,000 |
| on a typical home mortgage, $200 on a typical student loan, and $200 on |
| typical car payments. |
| |
|-------------------------------------------------------------------------|
Tax Cuts Passed by the Republican Congress This Year Would Cost More Than
$700 Billion; With Interest Costs They Drain More than $900 Billion From
the Surplus
Instead of passing one large tax bill, this year the Republican Congress is
passing its tax cuts piece by piece. But the economic and budgetary effect
is the same. According to the new analysis by OMB, these tax cuts now cost
more than $700 billion over 10 years. Accounting for additional debt
service, the total drain on the surplus is over $900 billion:
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| TAX CUTS PASSED BY CONGRESS THIS YEAR ($billions, 2001-10) |
| |
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| CostPassed By |
| |
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| Marriage Penalty$2931House and Senate |
| |
|-------------------------------------------------------------------------|
| |
| Estate Tax Repeal$105House and Senate |
| |
|-------------------------------------------------------------------------|
| |
| Small Business / Minimum Wage$123House and Senate2 |
| |
|-------------------------------------------------------------------------|
| |
| Social Security Benefits Tax Reduction$116House Ways & Means and |
| Senate3 |
| |
|-------------------------------------------------------------------------|
| |
| Communications Excise Tax Repeal$51House and Senate3 |
| |
|-------------------------------------------------------------------------|
| |
| Pension and IRA Limit Increases$52House |
| |
|-------------------------------------------------------------------------|
| |
| Affordable Education$21House Ways & Means and Senate |
| |
|-------------------------------------------------------------------------|
| |
| Patients Bill of Rights4$69House and Senate |
| |
|-------------------------------------------------------------------------|
| |
| Taxpayer Bill of Rights$7House |
| |
|-------------------------------------------------------------------------|
| |
| Trade and Development$4Enacted |
| |
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| Total Cost (eliminating duplication)$712 |
| |
|-------------------------------------------------------------------------|
| |
| Added Interest$201 |
| |
|-------------------------------------------------------------------------|
| |
| Total Drain on Surplus$913 |
| |
|-------------------------------------------------------------------------|
| |
| |
| Source: Cost estimates of individual bills are from Congress? Joint |
| Committee on Taxation and total cost is based on an analysis by the |
| Office of Management and Budget. The total cost excludes duplicate |
| provisions but does not take into account possible interactions of the |
| different provisions. |
| |
|-------------------------------------------------------------------------|
1 The passed bill sunsets after 2004 for procedural reasons. This estimate
assumes the tax cut is permanent.
2 Senate version is $103 billion.
3 Passed as an amendment to estate tax repeal in the Senate and then
stripped from the bill before final passage.
4 Passed in 1999 and currently in Conference. Senate version is $39
billion.
The Total Tax Cuts Passed By the 106th Congress Would Use $1.8 Trillion of
the Surplus ? At Least the Entire On-budget Surplus Over 10 Years
The Republicans have passed many of the pieces of the $792 billion tax bill
the President vetoed last year; and they describe the bills they have
passed this year as just a "down payment" on their ultimate goals. They
still have remaining many costly elements of last year?s bill, including
across-the-board rate reductions. If the Republican Congress has not
reversed its support for passing these tax cuts - this year or next - the
total drain on the surplus from 2001-10 would be $1.8 trillion. This
substantially exceeds OMB?s projection of a $1.47 trillion on-budget
surplus from 2001-10, leaving an on-budget deficit of over $300 billion.
It uses up the entire $1.81 trillion on-budget surplus in the Congressional
Budget Office?s more optimistic projections. This would risk our fiscal
discipline and leave nothing for other priorities like a voluntary Medicare
prescription drug benefit, paying down the debt by 2012, providing targeted
tax cuts to help working American families with the costs of college,
long-term care, child care, and raising larger families, and strengthening
Social Security and Medicare. (These on-budget surplus estimates exclude
Medicare surpluses, something that was proposed by the Vice President,
endorsed by the President, and agreed to in principle by the Republican
Congress.)
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| TOTAL TAX CUTS PASSED BY THE 106TH CONGRESS ($billions, 2001-10) |
| |
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| CostPassed By |
| |
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| Tax Cuts Passed This Year$712 |
| |
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| Some of the Tax Cuts Passed Last Year |
| |
|-------------------------------------------------------------------------|
| |
| Reduction in Tax Rates$490House and Senate1 |
| |
|-------------------------------------------------------------------------|
| |
| Individual Alternative Minimum Tax$1152Conference Agreement |
| |
|-------------------------------------------------------------------------|
| |
| Corporate Alternative Minimum Tax$14House and Senate1 |
| |
|-------------------------------------------------------------------------|
| |
| Capital Gains for Individuals$57House and Senate1 |
| |
|-------------------------------------------------------------------------|
| |
| Capital Gains for Corporations$8House and Senate1 |
| |
|-------------------------------------------------------------------------|
| |
| Interest Deduction on Worldwide Basis$29House and Senate1 |
| |
|-------------------------------------------------------------------------|
| |
| Extend R&E Tax Credit$183House and Senate |
| |
|-------------------------------------------------------------------------|
| |
| Extend exemption for Subpart F AFI$6Conference Agreement |
| |
|-------------------------------------------------------------------------|
| |
| |
| |
|-------------------------------------------------------------------------|
| |
| Total Cost (eliminating duplication)$1,447 |
| |
|-------------------------------------------------------------------------|
| |
| Added Interest$349 |
| |
|-------------------------------------------------------------------------|
| |
| Total Drain on Surplus$1,796 |
| |
|-------------------------------------------------------------------------|
| |
| |
| Source: Cost estimates of individual bills are from Congress? Joint |
| Committee on Taxation and total cost is based on an analysis by the |
| Office of Management and Budget. The total cost excludes duplicate |
| provisions but does not take into account possible interactions of the |
| different provisions. |
| |
|-------------------------------------------------------------------------|
1 Cost estimate is from H.R. 2488 as passed by the House.
2 Excludes the cost of the provisions passed as part of this year?s
marriage penalty bill.
3 Cost estimate is from H.R. 2488 as passed by the Senate excluding the
cost of the 5-year extension enacted in 1999. The Senate passed this
provision again this year as an amendment to estate tax repeal, but then
stripped it before final passage.
The Benefits Of Republican Tax Cuts For Typical Families Could Be Wiped Out
By Higher Payments On Everything From Mortgages to Student Loans
? An analysis by the Department of the Treasury of the major provisions
passed by House Ways and Means this year (estate tax repeal, marriage
penalty, limit increases for pensions and IRAs, Social Security benefit
taxation reduction, and other tax cuts) found that families in the middle
quintile of the income distribution got an average tax cut of $220.
? If a reversal of our fiscal discipline were to drive mortgage rates up
by even 1/3 of a percentage point, then a typical family with a $100,000
mortgage would see its annual payments go up by $270 - more than wiping out
the benefits of the tax cut.
? According to the analysis by the Department of the Treasury, the top 1
percent of taxpayers get about the same total dollar benefits from the
major tax cuts passed by House Ways and Means this year as the bottom 80
percent of taxpayers combined.
President Clinton?s Targeted Tax Cuts Would Provide More For Most Families
At a Much Smaller Total Cost
President Clinton has proposed tax cuts totaling $263 billion over 10
years. This fiscally responsible tax package would deliver more benefits
to more families than the much larger Republican tax package:
? The major tax cuts proposed by the President would provide an average
tax break of $371 annually for a person in the middle quintile of the
income distribution ? that is substantially more than the $220 annual tax
break they would get from the tax cuts passed by House Ways and Means,
which cost more than twice as much in total revenue.
? 66.4 percent of the benefits of the tax cuts proposed by the President
go to the middle 60 percent of Americans; in contrast, about 25 percent of
benefits of the tax cuts passed by House Ways and Means go to this group.
? President Clinton?s tax cut proposals build on a successful strategy
that has resulted in the lowest total Federal tax rates on typical families
in over two decades. The tax cuts signed into law by the President in 1993
and 1997 ? for example, the expanded Earned Income Tax Credit, the $500
child tax credit, the $1,500 HOPE Scholarship Tax Credit, and expanded IRAs
- have reduced taxes for American families. The total Federal tax rate for
the median-income family of four has dropped from 24.5 percent in 1992 to
22.8 percent in 1999 ? that?s the lowest tax rate since 1978. For families
at one-half the median income, the effective Federal tax rate has been
slashed from 19.8 percent in 1992 to 14.1 percent in 1999 - that?s the
lowest tax rate since 1968.
What Fiscal Discipline Means For American Families and the American Economy
? Goldman Sachs credits deficit and debt reduction with lowering
interest rates by 2 percentage points. "According to the model, the swing
in the federal budget position from a deficit of $290 billion in 1992 to a
surplus of $124 billion in 1999 - roughly matching the improvement in the
general government position - has lowered equilibrium bond yields by a full
200 basis points." [Goldman Sachs, "GSWIRE Undistorted by the Budget
Surplus," April 14, 2000. One "basis point" is 1/100 of a percentage
point.]
? Lower interest rates have already cut mortgage payments by $2,000 for
families with a $100,000 mortgage. Because of deficit and debt
reduction already achieved, a family taking out a home mortgage
of $100,000 expects to save roughly $2,000 per year in mortgage payments.
This has helped raise the homeownership rate from 64.0 percent in
1993 to 67.1 percent in the first quarter of 2000 - the highest rate
on record.
? Lower interest rates cut car payments by $200 annually for families
taking out a typical car loan.
? Lower interest rates cut student loan payments by $200 annually for a
person with a typical student loan.
? Each 1 percentage point reduction in mortgage rates reduces mortgage
costs by $250 billion over ten years. According to calculations by the
Department of the Treasury, a percentage point reduction in
interest rates saves families $250 billion over 10 years on mortgage
payments.
? Lower debt will help maintain strong economic growth. With the
government no longer draining resources out of capital markets,
businesses have more funds for productive investment. This has helped
to fuel a 12.5 percent real annual increase in productive equipment and
software investment since 1993 - seven consecutive years of double-digit
growth and the strongest period of growth on record. This compares
to 4.7 percent annual growth from 1981-92, a period that saw the debt held
by the public quadruple.
? Rising investment has contributed to a pickup in productivity growth.
Non-farm business productivity has grown at a 2.6 percent average
annual rate for the last five years, and a 3.2 percent average
annual rate for the last three years. This is more than double the 1.4
percent annual growth from the 1973 through 1990.
# # #
President and First Lady | Vice President and Mrs. Gore
Record of Progress | The Briefing Room
Gateway to Government | Contacting the White House | White House for Kids
White House History | White House Tours | Help
Privacy Statement