Bush, Congress Hide True Costs of Permanent Tax Cuts
by Guest Blogger, 3/19/2005
Both the president and Congress have advanced five-year budget plans in 2005. These plans help to mask the true cost of policies to extend the president’s first-term tax cuts permanently, which explode after the current proposed budget window ends in 2010. House Minority Leader Pelosi (D-CA) requested the Congressional Budget Office (CBO) simulate the effects of two different tax policies. The first simulation assumes current tax policy would remain unchanged — or that tax cuts passed in 2001 and 2003 would expire as scheduled. Under this simulation, the tax cuts include all provisions except the Alternative Minimum Tax (AMT). In the simulation, the AMT would have all of its parameters indexed to inflation and the exemption currently in place would be extended permanently. The second simulation assumes all of the tax cuts from 2001 and 2003 would be extended permanently, including the AMT. CBO found that under the first tax policy, revenues would slowly climb back to 20 percent of gross domestic product by 2015 from their historically low levels of approximately 16 percent of GDP today. Under the second simulation, it would take until 2050 for revenues to grow to 20 percent of GDP. The difference between these two options, according to the CBO, is an enormous amount of debt for the American people. The graph below compares the two different tax policies and their effect on the debt held by the public as a percentage of GDP. If current tax policies are made permanent without revenue offsets, as the president and many Republicans in Congress would like, the debt held by the public will explode to well more than 100 percent of the total economic output of the country before 2050. What is interesting about the CBO graph is there is hardly any noticeable difference between the two policies before 2010. This is exactly the reason why both the president and Republican leadership in Congress have planned a five-year budget for this year. By doing so, they are intentionally misleading the American public about the true cost of their current tax and budget policies.