The Coming Shakedown

June 2, 2004By Michael Leachman

When you use that credit card, sometimes it's easy to forget your purchase isn't free, even though your checkbook or your cash stays in your wallet. At some point, the bill shows up in your mailbox.

The government faces the same reality when it gives tax cuts and covers the cost by borrowing. At some point, the bill comes due. In order to pay off debt that is larger than current revenues can handle, the government - like the rest of us - has to either cut spending or get more money, or both.

The Bush Administration's tax cuts were funded with increased borrowing. To lots of folks that "early" refund seems like free money. But at some point the debt must be paid. Who's going to pay the debt for the Bush tax cuts?

We don't know right now how that question will be answered, but a new study by the Center on Budget and Policy Priorities and the Tax Policy Center provides strong evidence that most Americans will end up being net losers once the bill for the tax cuts comes due. Ultimately, the study finds, the cost of the tax cuts will overwhelm the immediate benefits for nearly all middle- and low-income Americans.

The study considers two scenarios for how the tax cuts will be paid in the future, once the cuts are fully phased-in and made permanent, as President Bush wants. The first scenario assumes that each year every American household will receive a direct tax cut based on the 2001 and 2003 changes, but also will pay an equal dollar amount to cover the full cost of the tax cuts each year. Specifically, each household would have to pay $1,520 per year to fully balance the annual cost of the tax cuts.

The second scenario posits that every American household gets the tax cut, but also pays back an equal percentage of their income. That is, each household would pay 2.6 percent of its income each year to fully pay for that year's tax cuts.

How will households pay the tax cut debt? Households would pay these costs through higher taxes, or cuts in government programs, or both. When programs like Medicare, student loans, child support enforcement, farm price supports, and the Earned Income Credit are cut, the incomes of millions of Americans are effectively or directly reduced. These are precisely the sorts of programs that will be cut under a proposal already circulating in the House to cap spending in "entitlement" programs. The White House's Office of Management and Budget has already been warning federal agencies to prepare for domestic program cuts after the election.

Under both scenarios in the study, more than three-quarters of households come out losers. They have to pay more for the tax cuts than they are worth. In total, the "poorest" 80 percent of American households - most of upper middle-, middle- and low-income America - would lose $113 billion per year under the first scenario and $27 billion per year under the second scenario.

The story is different for the richest of the rich. Households with incomes over $1 million would make out big-time. Under the first scenario, they would receive $35 billion each year in net tax cuts, even after paying their share of the cost. Under the second scenario, they would net $15 billion annually.

In other words, the Bush tax cuts will result in a massive redistribution of income. Money slips out of your wallet and slides through the window of a passing limousine. One economist called the tax cuts "Dooh Nibor Economics" because they will ultimately produce a backwards Robin Hood effect.

The reason it works out this way is that so much of the benefit of Bush's tax cuts goes to the richest of the rich. The ultimate effect of the cuts, especially once many of them are made permanent, is so beneficial to the richest Americans that it will be difficult and unlikely for Congress to produce a method of paying for the cuts that requires the wealthiest households to pay their fair share.

There's only one way to avoid the coming shake-down: repeal a significant portion of the tax cuts - the sooner the better. "Dooh Nibor" is coming fast, and he's after your wallet.

Michael Leachman is a policy analyst with the Oregon Center for Public Policy. He can be reached at [email protected]