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820 First Street NE, Suite 510
Washington, DC 20002
Tel: 202-408-1080
Fax: 202-408-1056
center@cbpp.org
www.cbpp.org
Revised March 28, 2008
EXTENDING THE PRESIDENT'S TAX CUTS AND AMT RELIEF
WOULD COST $4.4 TRILLION THROUGH 2018
By Aviva Aron-Dine
President Bush continues to urge that the tax cuts KEY FINDINGS
enacted in 2001 and 2003 be made permanent.
Despite the severe long-term budget shortfalls the · Making the 2001 and 2003 tax cuts
permanent, as proposed by the President,
nation faces, the Administration has not proposed and extending Alternative Minimum Tax
measures to offset the cost of extending these tax relief would add an additional $4.4 trillion
cuts. Nor has it proposed measures to pay for to deficits over the next ten years.
extending relief from the Alternative Minimum Tax,
which, if left unchanged, will affect increasing · Making the tax cuts permanent would
also dramatically worsen the nation's
numbers of middle-income taxpayers and take back a long-term fiscal problems. Even if the tax
substantial portion of the value of the 2001 and 2003 cuts expire or their costs are offset, the
tax cuts (see the box on page 3). debt in 2050 would stand at 105 percent
of the economy, already an alarming
· Making permanent the 2001 and 2003 tax cuts figure. But extending the tax cuts without
paying for them would essentially double
and AMT relief would have a direct cost of $3.7 the size of the debt in 2050; debt would
trillion over the next ten years (fiscal year 2009 then stand at more than 200 percent of
through 2018), according to Joint Committee on the economy.
Taxation and Congressional Budget Office
estimates. · Measured in today's terms, the annual
cost of the tax cuts when fully in effect
exceeds the combined annual budgets of
· Without offsets, making the tax cuts permanent the Departments of Education, Homeland
would increase the deficit and thereby add to the Security, Housing and Urban
national debt. The interest payments needed to Development, Veterans' Affairs, State,
service this higher level of debt would amount to Energy, and EPA.
about $700 billion over the next ten years. Thus,
· The cost of the tax cuts going to the top 1
the total cost of making these tax cuts percent of households alone is larger than
permanent, including the related interest costs, the entire budget of the Department of
would be $4.4 trillion over the ten-year period Education. The cost is so high because
(see the appendix). by 2010 -- the first year in which all
provisions of the 2001 and 2003 tax cuts
are fully in effect -- households in the top
· Once the tax cuts are fully in effect, their annual 1 percent of the income scale will receive
cost (not including debt service) will amount to average tax cuts of more than $60,000
about $400 billion per year. In 2007 terms, that apiece.
amount is about eight times what the federal
F:\media\michelle\POSTINGS\1-31-07tax-rev2.doc
government spent last year on K-12 and FIGURE 1
vocational education and about ten times Tax Cuts Cost More Than Most
what it spent on hospital and medical care
Agency Budgets
for veterans.
2007 Agency Budgets, Tax Cuts if Fully in Effect in 2007
$350 All Tax Cuts
· In today's terms, that amount also exceeds
$300
the combined 2007 budgets of the
Billions of Dollars
$250
Departments of Education, Homeland
Security, Housing and Urban $200
Development, Veterans' Affairs, State, $150
Tax Cuts for Veterans'
Energy, and the Environmental Protection $100 The Top 1%
Education
Affairs
Housing & Urban
Agency (see Figure 1). $50
Development
EPA
$0
· When the tax cuts are fully in effect, the Source: CBPP calculations based on Treasury Department, Joint Committee on Taxation, and
cost of tax cuts for just the highest-income Urban-Brookings Tax Policy Center data.
1 percent of households (those with
incomes above $450,000 per year) will be larger, in today's terms, than the entire budget of the
Department of Education. This cost is so high because by 2010, the first year in which all
provisions of the 2001 and 2003 tax cuts will be fully in effect, households in the top 1 percent
of the income spectrum will receive tax cuts averaging more than $60,000 apiece. (Households
with annual incomes above $1 million will receive tax cuts averaging more than $150,000.)
The costs of extending the tax cuts would be piled on top of the cost of already enacted tax cuts:
· Through fiscal year 2007, tax legislation enacted since 2001 has had a direct cost of $1.3 trillion,
according to Joint Committee on Taxation and CBO estimates. Another $900 billion in direct
costs will be incurred by 2018, even if the tax cuts expire as scheduled (and excluding the cost
of the recently enacted stimulus legislation).
· Because these tax cuts were not paid for, they are also generating substantial increases in the
national debt. The additional debt now being built up will persist even if the tax cuts are
allowed to expire on schedule. As a consequence, the interest payments that must be made
each year on the added debt will continue indefinitely, even if the tax cuts are not extended.
· With these interest costs included, the cost of the already enacted tax cuts will be $3.9 trillion
through 2018. As noted, the cost of extending the 2001 and 2003 tax cuts and providing AMT
relief will total $4.4 trillion through 2018. Thus, the total cost will come to about $8.4 trillion
for the period from 2001-2018; some $6.6 trillion of this cost will occur over the coming
decade, 2009-2018. (See the appendix for a detailed table.)
The Tax Cuts' Impact on the Medium- and Long-Term Fiscal Outlook
In fiscal year 2007, the cost of tax legislation enacted since 2001, including interest costs,
amounted to $300 billion. The fiscal year 2007 budget deficit totaled $162 billion. Thus, while the
President now seeks to balance the budget in 2012, the budget would have been balanced already had tax
legislation passed since 2001 not been enacted or been fully paid for.
2
Why We Include the Cost of AMT Relief in Our Estimates
The President's fiscal year 2009 budget calls for extending relief from the Alternative Minimum Tax
for only one year, 2008.* Including the cost of a permanent AMT fix, however, gives a much better
estimate of the true cost of the President's proposed tax policies. If AMT relief is not extended, a
substantial share of the value of the 2001 and 2003 tax cuts -- which the President wants to make
permanent -- will be taken back by the AMT.
This would occur because taxpayers owe the Alternative Minimum Tax whenever their tax liability, as
calculated under the AMT, is higher than their tax liability under the regular income tax. The 2001 and
2003 tax cuts sharply reduced households' tax liability under the regular income tax, without changing the
structure of the AMT. As a result, with the tax cuts in place, AMT liability exceeds regular income tax
liability for millions of additional households. These households then owe tax based on their AMT and
not their regular income-tax liability, and hence do not benefit in full from the tax cuts.
According to the Urban Institute-Brookings Institution Tax Policy Center, the AMT will take back
almost a third of the President's tax cuts by 2012. When the President urges that his tax cuts be made
permanent, he presumably does not mean only the two thirds of the tax cuts that would remain if the
AMT were left unchanged.
Indeed, much of the cost of AMT relief reflects the cost of providing taxpayers with the full value of
the President's tax cuts (see Figure 2). The cost of providing AMT relief from 2001 through 2018,
assuming that the tax cuts are extended, will be almost three times what it would have cost to provide relief
from the growth in the AMT that would have occurred in the absence of the tax cuts.*
In this analysis, we provide estimates of the full cost of extending the 2001 and 2003 tax cuts and
AMT relief through 2018. This is what it would cost the nation to extend the President's tax cuts and
provide the AMT relief required to ensure those tax cuts would not be cancelled out in significant part by
the AMT. Of the $4.4 trillion cost (including interest), about $500 billion reflects the cost of addressing
the AMT problem that existed prior to 2001 (that is, the AMT problem that would still have existed had
the 2001 and 2003 tax cuts not been enacted). The remaining $3.9 trillion reflects the cost of the
President's tax policies.
FIGURE 2
Two-Thirds of the Cost of AMT Relief Is
Two-
Due to The President's Tax Cuts
Cost of AMT Relief, 2001-2017,
Billions of Dollars
$200
Cost of Addressing the Pre-2001
AMT Problem
$160
Additional Cost Due to the 2001
& 2003 Tax Cuts
$120
$80
$40
$0
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: CBPP based on Tax Policy Center, CBO, & Joint Committee on Taxation estimates
_____________________
* Estimates of the cost of addressing the pre-2001 AMT problem are based on Tax Policy Center estimates of the
cost of indexing the 2000 AMT exemption level for inflation (and allowing personal non-refundable credits under
the AMT), as of 2000. Estimates of the cost of continuing AMT relief through 2018 are from CBO, and estimates
of the cost of AMT relief already enacted are from the Joint Committee on Taxation.
3
Extending the Tax Cuts Would Significantly Worsen the Long-Term Fiscal Outlook
CBPP projections (which are based on Congressional Budget Office data) show the outlook for
the federal budget under current policies is bleak, even if the tax cuts expire or are fully offset.1
Under those circumstances, the national debt would reach 105 percent of GDP by 2050.
But extending the tax cuts enacted since 2001 without paying for them would sharply worsen this
already very troubling long-term fiscal outlook. The tax cuts reduce revenues by about 2 percent of
GDP each year. In addition, each year of
extending the tax cuts without paying for FIGURE 3
them would add to the national debt and Debt With and Without Unpaid-For
therefore to interest payments. As a result of Extension of Recent Tax Cuts
the compounding effects over time, Debt as a Share of the Economy
extending the tax cuts without paying for
them would essentially double the size of the 250%
Debt If Tax Cuts Expire
2 Or Are Paid For
debt in 2050 (see Figure 2). 200%
Additional Debt If Tax Cuts
Extended Without Offsets
Thus, the tax policy decisions that 150%
Congress will make over the next few years 100%
will have a profound impact on the nation's
fiscal future. While putting the nation on a 50%
sustainable fiscal path will be very difficult in 0%
any case, it will be far more difficult if the tax 2000 2010 2020 2030 2040 2050
cuts are made permanent without offsets. Source: CBPP calculations based on Congressional Budget Office data.
The Tax Cuts' Impact on the Economy
The President and members of the Administration routinely argue that the tax cuts should be
made permanent for the sake of the economy. This argument does not withstand scrutiny.
1 For further discussion and an explanation of our projections, see Richard Kogan, Matt Fiedler, Aviva Aron-Dine, and
James Horney, "The Long-Term Fiscal Outlook Is Bleak: Restoring Fiscal Sustainability Will Require Major Changes to
Programs, Revenues, and the Nation's Health System," Center on Budget and Policy Priorities, January 29, 2007. These
projections are based in part on projections issued by the Congressional Budget Office in December 2005.
Incorporating data from CBO's more recent long-term projections would not change any of the general conclusions
discussed above.
2 Our long-run projections assume that, even if the tax cuts are allowed to expire, AMT relief equivalent to that needed
to address the pre-2001 AMT problem still would be provided. That is, in measuring the tax cuts' impact on the long-
term problem, we include only the added cost of AMT relief attributable to the 2001 and 2003 tax cuts (see box on page
3). In addition, in our projection of the effects of extending the tax cuts without offsets, we assume that Congress
extends both the 2001 and 2003 tax cuts and accompanying AMT relief and also the so-called "tax extenders" discussed
in the box on page 5. Even if the costs of the "extenders" were excluded, extending the 2001 and 2003 tax cuts and the
additional AMT relief necessitated by those tax cuts still would virtually double the size of the debt in 2050, relative to
what it otherwise would be.
4
Extending Other Expiring Tax Provisions Would Add to Costs
The 2001 and 2003 tax cuts and AMT relief are by far the largest tax provisions set to expire before
2018, but about 80 smaller provisions are set to expire as well. Many of these provisions are commonly
referred to as tax "extenders," because they are routinely extended by Congress each time they are slated
to expire. The provisions include the research and experimentation tax credit, the state and local sales tax
deduction, and numerous others. Some of these provisions existed before 2001, but the large majority of
them have been added since.
According to the Congressional Budget Office and the Joint Committee on Taxation, making all of
these provisions permanent would cost about $400 billion between 2009 and 2018, or about $500 billion
if interest costs are included. Thus, the cost of extending all expiring tax provisions, including the 2001
and 2003 tax cuts, AMT relief, and the "extenders" would total $4.1 trillion over the 2009 to 2018 period,
or $4.9 trillion including interest.
Every recession in modern U.S. history has been followed by an economic expansion, regardless
of whether taxes were cut, increased (as in the early 1990s), or left unchanged. The recent tax cuts
were no more responsible for the fact that the economy recovered from the recession that occurred
in 2001 than the tax increases of 1990 and 1993 were responsible for the fact that the economy
recovered from the downturn of the early 1990s, instead of remaining permanently stagnant.
Moreover, compared with other post-World War II recoveries, the recovery that began in 2001 is
well below average. If tax cuts are crucial to economic growth, then that recovery should stand out
brightly in comparison to previous recoveries. It should certainly outshine the comparable years of
the 1990s recovery, during which taxes were increased. Instead, with respect to overall economic
growth, as well as growth in consumption, investment, wages and salaries, and employment, the
expansion that began in 2001 is either the weakest or among the weakest since World War II.
Investment, wage and salary, and employment growth also have been significantly weaker than
during the 1990s. (These comparisons held true even before the slowdown of the past few quarters
began. 3)
Further, as discussed above, making the tax cuts permanent without paying for them would
dramatically increase deficits and debt in future decades. A number of studies by highly respected
institutions and economists have found that, if major tax cuts are deficit-financed, the negative
effects of higher long-term deficits are likely to cancel out or outweigh any positive economic effects
that might otherwise have resulted from the tax cuts.4 All else being equal, large deficits lower
3 For further discussion, see Aviva Aron-Dine, Chad Stone, and Richard Kogan, "How Robust Is the Current Economic
Expansion?" Center on Budget and Policy Priorities, revised January 14, 2008, http://www.cbpp.org/8-9-05bud.htm.
For discussion of the claim that extending the tax cuts would provide economic stimulus and help the economy recover
from its current slow-down, see Aviva Aron-Dine, "Another Misdiagnosis: Marginal Rate Reductions and Extensions of
Tax Cuts Expiring in 2010 Not the Right Medicine for the Economy's Short-Term Ills," Center on Budget and Policy
Priorities, January 15, 2008, http://www.cbpp.org/1-15-08tax.htm.
4 See, for example, Alan J. Auerbach, "The Bush Tax Cut and National Saving," National Tax Journal, Volume LV, No.
3, September 2003; and Douglas W. Elmendorf and David L. Reifschneider, "Short-Run Effects of Fiscal Policy with
Forward-Looking Financial Markets," prepared for the National Tax Association's 2002 Spring Symposium;
Congressional Budget Office, "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax
5
national savings and thereby lower future national income. For instance, a comprehensive study of
the 2001 and 2003 tax cuts by Brookings Institution economist William Gale and then-Brookings
Institution economist (now CBO director) Peter Orszag found that making the tax cuts permanent
without offsetting their cost would be "likely to reduce, not increase, national income in the long
term."5 The bottom line is that large deficit-financed tax cuts are as, or more, likely to reduce
investment and economic growth as to increase them.
In an analysis of the long-run budget situation, the Congressional Budget Office commented that
the economic benefits associated with maintaining lower marginal tax rates "are small compared
with the economic benefits of moving the budget onto a sustainable track."6 By doubling the size of
the fiscal problem through 2050, extending the tax cuts without paying for them would make this far
more difficult to do. It would be imprudent not only in light of the effects on the federal budget but
also in light of the likely effect on the U.S. economy.
Rates," December 2005; and Joint Committee on Taxation, "Macroeconomic Analysis of Various Proposals to Provide
$500 Billion in Tax Relief," JCX-4-05, March 1, 2005.
5Williams Gale and Peter Orszag, "Bush Administration Tax Policy: Effects on Long-Term Growth," Tax Notes,
October 18, 2004. See also Gale and Orszag, "Deficits, Interest Rates, and the User Cost of Capital: A Reconsideration
of the Effects of Tax Policy on Investment," Urban Institute-Brookings Institution Tax Policy Center, August 19, 2005.
6 Congressional Budget Office, "The Long-Term Budget Outlook," December 2005.
6
Appendix: Detailed Cost Estimates
Table: Cost of Enacted Tax Cuts &
Extension of the 2001 and 2003 Tax Cuts & AMT Relief
(In Trillions of Dollars)
2001-2018 2009-2018
Cost of Enacted Tax Cuts
2001 and 2003 Tax Cuts
Direct Cost $2.0 $0.6
Interest Cost 1.7 1.4
Total Cost 3.7 2.0
Other Tax Cuts Enacted Since 2001
Direct Cost 0.1 0.0
Interest Cost 0.1 0.1
Total Cost 0.2 0.1
All Tax Cuts Enacted Since 2001
Direct Cost 2.1 0.6
Interest Cost 1.8 1.5
Total Cost 3.9 2.1
Cost of Extending the Tax Cuts
2001 and 2003 Tax Cuts & AMT Relief
Direct Cost $3.7 $3.7
Interest Cost 0.7 0.7
Total Cost 4.4 4.4
Cost of Enacted & Extended Tax Cuts
Tax Cuts Enacted Since 2001 & Extension
of 2001 and 2003 Tax Cuts & AMT Relief
Direct Cost $5.8 $4.3
Interest Cost 2.5 2.3
Total Cost 8.4 6.6
Source: CBO and Joint Committee on Taxation estimates. Amounts may
not add due to rounding. Excludes cost of tax cuts enacted in 2008
economic stimulus legislation.
7