The Ultimate Burden of the Tax Cuts

Publication Date: June 2004

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): William G. Gale; Peter R. Orszag; Isaac Shapiro

Research Area: Banking and finance; Economics

Keywords: Health care costs; Public finance; Household income; Tax code

Type: Report

Abstract:

Popular discussions about the advisability of recent tax cuts have frequently ignored a simple truism: someone, somewhere, at some time will have to pay for them. The payment may be in the form of increases in other taxes, reductions in government programs, or some combination of the two; the payment may occur now or later; it may be transparent or hidden. But iron laws of arithmetic and fiscal solvency tell us that the payment has to occur.

Some tax-cut advocates try to deny the fundamental fact that the tax cuts will need to be paid for. For example, some claim the cuts will generate enough economic growth to “pay for themselves.” As discussed below, the evidence not only does not support such claims, it implies precisely the opposite result — that sustained deficit financing of tax cuts will end up reducing long-term economic growth, thereby raising the cost of the tax cuts. Others claim the repayment can be postponed indefinitely. But given the nation’s large underlying long-term fiscal imbalance even without the tax cuts, such indefinite postponement of paying for the tax cuts is simply not possible — it eventually would spark a serious fiscal crisis. (Similarly, large increases in spending, such as occurred with the enactment of the Medicare drug benefit, will also need to be paid for.)