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TPC Discussion Paper No. 15
Note: This report is available in its entirety in the Portable Document Format (PDF).
"The future promise of any nation can be directly measured by the present prospects of its youth."
—President John F. Kennedy, February 14, 1963.
"We will not deny, we will not ignore, we will not pass along our problems to other Congresses, to other Presidents, and other generations."
—President George W. Bush, January 28, 2003.
Today's children represent—literally—the future of the country. The notion that children and future generations should have better living standards than current generations is central to universally shared views of economic progress.
Public policies often assist children directly. Spending programs provide education, nutrition, and physical and mental health care. Many of these programs are appropriately regarded as productive investments in the future of the country. Reliable evidence from controlled social experiments shows that such interventions can improve health and education outcomes, and reduce activities with negative consequences (such as crime, drug use, and teenage child-bearing). Research also shows that the expenditures required to undertake the programs can generate substantial rates of return in terms of lower government costs and higher revenues in the future.1
Perhaps less obviously, policies that do not focus explicitly on children nevertheless can significantly affect youth and future generations. For example, programs that raise productivity and economic growth, pay down the public debt, clean up the environment, improve the nation's infrastructure, or invest in research and experimentation can improve lifetime prospects for today's children and future generations. Likewise, other policies that do not explicitly focus on children or future generations can have negative consequences for those groups. The indirect effects of policy choices on children are potentially at least as important as the direct effects, especially because the indirect effects typically receive less attention.
This paper examines the direct and indirect effects of one set of policies—the tax cuts and the Medicare spending increases that have been proposed and enacted since January 2001—on the long-term economic prospects of today's and tomorrow's youth. These proposals were not typically discussed in terms of their impact on children, other than a few vague claims to being "pro-family."2 Nevertheless, these recent fiscal policies will significantly and adversely affect both future generations as a whole and a substantial majority of children in the current and each subsequent generation.
The starting point of our analysis is the finding from numerous studies that recent fiscal policies will not increase (and could well reduce) the size of the economy in the long term, relative to what would have occurred had the policies not been introduced. Therefore, rather than raise the amount of resources available for future generations, the policies will mainly redistribute a fixed (or declining) amount of resources. The recent tax cuts, proposals to make them permanent, and the Medicare prescription drug bill will conservatively cost the federal government more than $34 trillion in present value in increased (non-interest) expenditures and reduced revenues. These initiatives are best thought of as loans, though, not grants.3 They must eventually be financed with either tax increases or spending cuts, and the patterns of repayment are not necessarily linked to who receives the benefits. The resulting redistribution will occur through two broad channels—across generations and within generations. In both cases, it will hurt economic prospects for the majority of today's and tomorrow's youth.
The policies will redistribute resources across generations by raising the fiscal burdens placed on future generations and reducing the burdens placed on current generations. By raising spending and cutting taxes now, but not increasing economic growth, recent fiscal policy actions imply either cuts in future spending or increases in future taxes to keep the government budget in balance. The precise magnitude of the intergenerational burdens created is not currently available but plausibly runs in the tens of thousands of dollars per child today and in the future on a lifetime basis.
The policies will also redistribute resources within generations. Examined in isolation, the recent tax cuts give benefits to most families.4 But it is misleading to look at who benefits without also considering how the tax cuts will be financed. Under plausible ways of paying for the tax cuts, most families with children will be worse off; i.e., they would be better off without the tax cut plus financing than with those policies.
The inter- and intragenerational redistributions noted above will exacerbate the effects of several federal budget trends that, taken together, will create significant pressure to reduce federal funding for children in the near and lasting future. For example, the difference between federal revenues and spending on interest, defense, and elderly entitlements represents the amount left over to fund all other federal initiatives, including those for children. This difference is slated to fall by two-thirds, from 8.6 percent of GDP in 2000 to 2.8 percent in 2014.
This decline will put significant pressure on all federal programs, but especially programs that invest in children because many must be annually funded and hence face political battles and trade-offs every year. A related problem is that most recent social initiatives have been enacted through tax changes, rather than as spending programs. But unless tax subsidies are refundable, which has proven controversial, they cannot help the 25 percent of all children who live in families that face no income tax and who are presumably the most economically vulnerable youth.
The federal tax cuts will also squeeze state budgets, since many state income taxes are linked to the federal system. Because many children's programs are funded through the states, though, the resulting state budget pressures could be as damaging to prospects for children as the pressures at the federal level (McNichol and Harris 2004).
If recent policies have such deleterious effects on children and future generations, it is natural to ask if there are better ways to deploy the resources. We outline the factors supporting a comprehensive set of investments in today's children, as well as the changes in federal taxes, spending, and budget process that would enable and protect such changes.
The paper is organized as follows. The first section describes the tax cuts and the Medicare bill. The second section discusses the effects on economic growth. The third and fourth sections examine redistribution across and within generations. The fifth section explores federal budgetary issues. The sixth section VII discusses a program of investment in children. The seventh section concludes.
Notes from this section of the report
1. For a careful analysis of these issues, see the contributions in Sawhill (2003).
2. For an exception to the general rule, see Burman, Maag, and Rohaly (2002), who provide a detailed analysis of the effects of the 2001 tax cut on families and children.
3. We thank Sara Watson for this terminology.
4. We are not able to provide estimates of the within-generation distributional effects of the Medicare bill.
Note: This report is available in its entirety in the Portable Document Format (PDF).
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