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Senate Passes $70 Billion in Tax Cuts
Measure Set to Become the Sixth Reduction in Six Years Amid Warnings on Deficit

By Jonathan Weisman
Washington Post Staff Writer
Friday, May 12, 2006

The Senate gave final approval yesterday to a five-year, $70 billion tax package that would extend deep cuts to tax rates on dividends and capital gains for two years, effectively locking in all of President Bush's first-term tax cuts through the end of the decade.

On a vote of 54 to 44, the Senate approved the sixth tax cut in the past six years, handing the White House a much needed victory and the embattled Republican Party an achievement that members believe they can use to pull themselves out of a political hole.

Republican Sens. Olympia J. Snowe (Maine), Lincoln D. Chafee (R.I.) and George V. Voinovich (Ohio) voted against the measure, while Democratic Sens. Bill Nelson (Fla.), Ben Nelson (Neb.) and Mark Pryor (Ark.) voted for it. Both Maryland Democrats voted no, and both Virginia Republicans voted yes. The House approved the package on Wednesday, and Bush said he will sign it enthusiastically once it reaches his desk.

But with interest rates rising, the dollar falling and the budget deficit stuck at around $300 billion, tax experts warn that the tax code Bush has transformed may not survive to its Dec. 31, 2010, expiration date and that Congress may have to step in again because tax revenue will not meet all of the government's needs. "We have a train wreck waiting to happen," said C. Clint Stretch, director of tax policy at the accounting giant Deloitte & Touche.

Even some of the tax cuts' strongest supporters concede that the tax code as written could not generate sufficient revenue to support the retirement programs during the coming crush of baby boomers.

"You cannot grow your way out of these deficits," said Senate Budget Committee Chairman Judd Gregg (R-N.H.). "In order to address the long-term entitlement problem, we're going to have to do major structural reform, and it's going to have to be comprehensive," targeting taxes and spending, he said.

The measure would extend the president's 2003 investment tax cuts to 2010, two years beyond their original expiration date. It would save more than 15 million Americans from the alternative minimum tax, which was enacted to target the rich but has increasingly hit the upper middle class. And it would provide a variety of other tax breaks -- to Nashville recording companies, songwriters, Great Lakes shippers and the University of Texas, among others.

"Let me make it perfectly clear: This legislation is good news for working Americans and for the economy of this country," said Sen. Trent Lott (R-Miss.).

A recent surge in tax receipts has given Republicans cause to crow that their tax cuts -- $2 trillion in all over this decade -- have stimulated the economy and have, at least partially, paid for themselves. As Sen. Robert F. Bennett (R-Utah) put it, "rivers of cash" have pushed tax receipts through April to $1.35 trillion, up $137 billion, or 11.2 percent, compared with this time last year.

"We've put these tax provisions in place, and they've raised money," said Sen. Rick Santorum (R-Pa.).

Bush has not received what he has demanded for years, a permanent extension of his tax cuts. But Congress has largely given him the tax code he has asked for. Although the tax system remains fundamentally unchanged, relative tax burdens within that system have been shifted, Stretch said.

The biggest winners have been middle-income couples with children, who have had their income tax rates cut and their child tax credit doubled, while income tax rates have been adjusted to favor marriage. Affluent investors and savers have also done very well, seeing rates on most capital gains reduced from 20 percent to 15 percent, rates on most dividends reduced to 15 percent from as high as 38.6 percent, and limits on tax-protected individual retirement accounts and 401(k) plans raised substantially.

The big losers have been middle-income singles with no children, who have been left "with very substantial penalties at a time when the population is aging and more and more people are going to be single, not because they don't believe in marriage but because their spouses died," Stretch said.

But tax policy experts warn that neither the winners nor the losers should dwell on their plights for long. The current tax code is simply not sustainable, University of Michigan tax economist Joel B. Slemrod said. Indeed, he said, the biggest policy change over the past six years has been the imbalance between tax collections and federal expenditures. In 2000, federal receipts totaled $2.03 trillion, or 20.9 percent of the gross domestic product, while spending totaled $1.79 trillion, or 18.4 percent of the GDP.

This year, those proportions have flipped. The Congressional Budget Office expects revenue to reach $2.31 trillion, or 17.7 percent of the GDP, while spending will hit $2.65 trillion, 0r 20.3 percent of the GDP.

House Majority Leader John A. Boehner (R-Ohio) said that holding the line on spending while allowing the low tax rates to spur the economy will close the gap. But the spending problem lies not so much with the federal programs at Congress's annual discretion but with entitlement programs such as Medicare and Social Security, which will grow by 23 percent through 2010.

To close the projected budget deficit by 2010, the economy would have to grow at an average annual rate of 4.9 percent -- or 5.5 percent if war costs continue but taper off, according to Leonard E. Burman, a tax policy analyst at the Urban Institute. Such rates have not been seen since the mid-1960s, and most economists see them as impossible, if for no other reason than that the Federal Reserve Board would raise interest rates enough to cool down the growth.

"The economy has been fairly strong over last few years, and that makes it harder to make the case that, in the short run, tax cuts inevitably lead to tax increases or spending cuts," Slemrod said. "But I don't think anybody disagrees there are very large fiscal imbalances in the government. It's very clear we've made no progress. In fact, we've made the problem worse."

The tax code has its own time bombs. If nothing is done, the reach of the alternative minimum tax will grow steadily. By 2013, a parallel income tax structure enacted only to ensure that a few affluent Americans pay their fair share will be collecting more revenue than the traditional tax system. But repealing the AMT would cost the government more than $1 trillion over a decade.

And by the time the next president comes into office in 2009, he or she will be staring at a startling deadline, Jan. 1, 2011, when taxes would rise sharply and suddenly on every American who pays income taxes, has children, is married, owns stocks and bonds, or is expecting a large inheritance.

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