View Research by Author - Isaac Shapiro

Citation URL: http://www.urban.org/IsaacShapiro

In his recent statement responding to the tax reconciliation bill conference agreement, President Bush asserted that failure to extend the tax cuts contained in the bill would be "disastrous" for "all working Americans." In this analysis, we consider three possible approaches to paying for the tax cuts: one that approximates financing largely through cuts in federal programs, one that approximates financing through a combination of program cuts and progressive tax increases, and a third that approximates financing entirely through progressive tax increases. Under all three scenarios, the average household with income below $100,000 would lose from the tax bill.

Popular discourse about tax cuts frequently ignores a simple truism: Someone, somewhere, at some time will have to pay for them. The payment may be in the form of increases or reductions in government programs; it may occur now or later; it may be transparent or hidden. But iron laws of arithmetic and fiscal solvency imply that the payment has to occur.

Tax cuts are not free; they must be financed with some combination of tax increases or spending cuts. The central goal of this paper is to apply this standard insight from public finance to the analysis of the distributional effects of making the 2001 and 2003 tax cuts permanent. We estimate not only who benefits directly from the tax cuts, but also who benefits and who loses once the financing of the tax cuts is considered. We consider two scenarios: one in which each household pays an equal dollar amount to finance the tax cuts and one where each household pays the same share of income. In both cases, more than three-quarters of households end up worse off if the tax cuts are made permanent and financed. In addition, there are large aggregate transfers from the majority of low- and middle-income households to an affluent minority. These results show that, far from simply "giving people their money back," making the tax cuts permanent would impose significant losses on tens of millions of American households.

Return to list of authors