Contrary to President's Claim, Large Majority of Americans Ultimately Are Likely to Lose From Tax Reconciliation Bill

Posted with permission of the Center on Budget and Policy Priorities

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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."²

The President's claim is implausible in light of the distribution of the reconciliation bill's benefits. Some 68 percent of all American households will receive no tax cut at all from the legislation, and the average tax cut for households in the middle fifth of the income distribution will be $20. While the $43,000 average tax cut that households with incomes over $1 million will get from the bill could have a significant impact on a family's finances, it hardly seems that the loss of a $20 tax benefit would qualify as a disaster.

An even larger fallacy in the President's claim is that it rests on the assumption that the tax cuts are a costless gift from a beneficent government. In fact, deficit-financed tax cuts eventually have to be paid for. The 68 percent of households that receive nothing from the tax cuts will, nonetheless, almost surely have to bear a share of the costs. More than 85 percent of all households have incomes below $100,000, and the vast majority of these households will be net losers when the financing costs of the tax reconciliation bill are considered, according to an analysis by the Urban Institute-Brookings Institution Tax Policy Center. Moreover, if the tax reconciliation bill is taken to have been partly financed by the spending reconciliation bill enacted earlier this year, then households with modest incomes are already net losers from the tax cuts (see discussion on page four).

Some claim that there really is a free lunch to be had in this case because the tax cuts will spur economic growth, which will help everyone and generate enough additional revenue to offset most, if not all, of the tax cuts' costs. That claim is not supported by the evidence (see box on page three). Rather, it is widely recognized that the tax cuts eventually must be financed. Financial markets will not indefinitely tolerate large, persistent, and growing deficits of the type that the nation is projected to face. As former Federal Reserve Chairman Alan Greenspan warned, "If you're going to lower taxes, you shouldn't be borrowing essentially the tax cut. And that over the long run is not a stable fiscal situation."³ Simply stated, funds that are borrowed must eventually be paid back.

Notes from this section of the report

1 Aviva Aron-Dine is a research assistant at, and Isaac Shapiro an associate director of, the Center on Budget and Policy Priorities. Leonard E. Burman is the director of the Urban Institute-Brookings Institution Tax Policy Center and a senior fellow at the Urban Institute. Views expressed in this piece do not represent those of the Urban Institute, its board, or its funders. The authors wish to thank Jeff Rohaly for providing the estimates underlying this analysis.

2 "President Urges Senate to Pass Tax Cut Legislation," White House release, May 10, 2006.

3 Chairman Alan Greenspan in "US Representative Jim Nussle (R-IA) Holds Hearings on the Budget and the Economy," FDCH Political Transcripts, September 8, 2004.

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