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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)

Cost Passed By

 Marriage Penalty                       $2931           House and Senate
 Estate Tax Repeal                      $105            House and Senate
 Small Business / Minimum Wage          $123        House and Senate (2)
 Social Security Benefits Tax           $116      House Ways & Means and
   Reduction                                                  Senate (3)
 Communications Excise Tax Repeal       $51         House and Senate (3)
 Pension and IRA Limit Increases        $52                        House
 Affordable Education                   $21       House Ways & Means and
                                                                  Senate
 Patients Bill of Rights4               $69             House and Senate
 Taxpayer Bill of Rights                $7                         House
 Trade and Development                  $4                       Enacted

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)

Cost Passed By

Tax Cuts Passed This Year $712

Some of the Tax Cuts Passed Last Year

 Reduction in Tax Rates                 $490        House and Senate (1)
 Individual Alternative Minimum Tax     $1152       Conference Agreement
 Corporate Alternative Minimum Tax      $14         House and Senate (1)
 Capital Gains for Individuals          $57         House and Senate (1)
 Capital Gains for Corporations         $8          House and Senate (1)
 Interest Deduction on Worldwide Basis  $29         House and Senate (1)
 Extend R&E Tax Credit                  $183            House and Senate
 Extend exemption for Subpart F AFI     $6          Conference Agreement

Total Cost (eliminating duplication) $1,447

 Added Interest                         $349
 Total Drain on Surplus                 $1,796

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.

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