What we miss when we talk about tax cuts
Every estimate you’ve heard of who is being helped and who is being hurt by the tax cuts proposed by the various Republican presidential campaign is telling you, at best, only half the story. And that’s because these estimates only look at one side of the ledger: who gets the tax cuts. But there’s another side to the ledger: Who pays for them, and how? That side is at least as important as who gets the tax cuts, but it’s almost always ignored.
Most of the estimates so far have come from the nonpartisan Tax Policy Center. But Donald Marron, co-director of the TPC, is happy to admit the blind spot in their models. “In a perfect world, you would do a distributional analysis of all federal policies, integrating the spending and tax side. If you do just the tax side, you’re missing a whole lot.”
William Gale, the TPC’s other director, agrees. “One doesn’t know the full distribution of the net benefits or burdens of a tax cut until you know how it is financed.”
The problem is that there’s no way to model the pay-fors. No Republican campaign has explained how they will fund their tax cuts. So there’s no plan to speak of, and thus no plan to analyze.
But every Republican campaign has laid out its principles: No tax increases now or in the future. So that takes one pay-for off the table. They’ve also been clear that deficits need to come down. So that removes another. The only pay-for left is spending cuts. And that’s where things get regressive.
Most federal spending goes to low-income Americans, seniors and defense. Republicans oppose further defense cuts. So the pot of federal spending they can use to pay for their tax cuts mainly consists of programs for low-income Americans and seniors. And keep in mind that the tax cuts are expensive. Every Republican has proposed making the Bush tax cuts permanent, which will cost $4 trillion over 10 years, and every Republican has proposed further tax cuts worth trillions of dollars.
Take Romney. His tax cuts add $2-$3 trillion to the cost of the Bush tax cuts. So he needs to find somewhere in the neighborhood of $6-$7 trillion in spending cuts. You can’t get there without slicing deep into the bone of Medicare, Social Security, Medicaid and dozens of other popular programs.
It won’t come from spending programs that substantially benefit top earners. That’s because there really aren’t spending programs that substantially benefit top earners. You could means test Social Security and Medicare, but that’s only going to get you so far — and it’s going to be pretty unpopular. “The tippy-top of the income distribution doesnt get gigantic payouts from spending programs,” Marron said. “If you’re making adjustments on the spending side, you’d anticipate the upper end of the income distribution won’t feel it.”
Consider the difference, too, between George W. Bush’s tax cuts and the Republicans who want to extend his tax cuts. When Bush proposed most of his tax cuts, the financing came from the surplus. That money could have also gone toward shoring up Social Security, or expanding programs to help low-income Americans, but using it for tax cuts didn’t require, at least in theory, taking benefits away from anybody. Extending the Bush tax cuts, in a time of deficits, does require sharp cuts in benefits.
In 2004, Gale, Peter Orszag and Isaac Shapiro looked at how paying for the Bush tax cuts would change their distributional impact. They assumed something called “equal-payment financing”: Every household pays the same amount in benefit cuts and new taxes. This is, for the tax cuts, a favorable assumption, as the distribution of federal spending actually ensures that low-income households will pay much more than high-income households if new taxes aren’t part of the pay-fors. Even so, the results were staggering.
“Low-income households would be hit extraordinarily hard,” wrote Gale, Orszag and Shapiro. “Their average direct tax cut would be $19, but with payments of $1,520, the average loss would be about $1,500 per year. For the middle fifth of households, the average loss would be $869 per year. In sharp contrast, the top 1 percent of households would receive an average net gain of $38,800 per year, even after paying $1,520. Households with incomes exceeding $1 million would gain nearly $135,000 per year.”
Bottom line: “The annual transfer from the 80 percent of households with incomes below $76,400 to the top 20 percent of households with incomes above that level would be $113 billion under equal-dollar financing.”
That number would be much larger in the context of the current crop of Republican tax plans, as the plans themselves are larger.
“Popular discourse about tax cuts frequently ignores a simple truism,” wrote Gale, Orszag, and Shapiro. “Someone, somewhere, at some time will have to pay for them. The payment may be in the form of increases in other taxes or reductions in government programs; it may occur now or later; it may be transparent or hidden. But iron laws of arithmetic and fiscal solvency imply that the payment has to occur.”