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Bizarre Tax-Cut Presentations Don't Add Up


Bizarre Tax-Cut Presentations Don't Add Up

September 5, 2000

AL Gore: $500 billion in tax cuts. George W. Bush: $1.3 trillion. Hillary Clinton: $496 billion. Rick Lazio: $776 billion to more than $1 trillion, depending on whom you believe and how you count.

If all the tax-cut numbers floating around in this year's campaigns sound pretty unreal, it's for good reason: Washington and the major media have taken to presenting them in a needlessly bizarre way.

Virtually all talk of tax cuts and budget surpluses now revolves around 10-year cumulative estimates--easily the most inflated, least reliable measure available.

It's an outgrowth of a fairly new wrinkle in the federal government's arcane budget accounting rules. In 1990, the Senate switched from a five-year horizon for federal budget plans to a 10-year rule for all spending and revenue measures. By '96, the Congressional Budget Office (CBO) had followed suit, extending its bellweather economic and budget outlooks to 10 years.

This year's official CBO outlook gave us the prediction that federal budget surpluses between now and 2010 will add up to over $4 trillion, which is more than twice the entire current federal budget. The media and politicians have endowed this number with an almost mystical level of certainty, although it is no more concrete than a 10-year weather forecast.

When all is said and done, the real bottom line on any tax cut--whether you're talking about the recurring budget "cost" or the impact on hypothetical taxpayers--is the amount people save in the year when all the provisions kick in.

Viewed this way, Bush has proposed a $144 billion income-tax cut--that's his plan's annual value once all provisions kick in (in 2006)--plus a $52 billion estate-tax repeal (when fully effective in 2009). It's equivalent to about 1.2 percent of GDP and 6.4 percent of the federal revenues now projected for 2006.

By historical standards, that's a modest amount. A recent Treasury Department study found that Ronald Reagan's 1981 tax cut, when fully effective in 1985, was equivalent to more than 4 percent of GDP and about 19 percent of federal revenues. The second largest modern cut, the Kennedy-Johnson income tax cut of 1964, was equal to 1.6 percent of GDP and 9 percent of total revenues.

On the other hand, the combined impact of the 1990 and 1993 revenue bills was a tax hike of 1 percent of GDP and 6 percent of total revenues by 1995.

In other words, relative to the economy and the budget, Gov. Bush would return to taxpayers roughly the same amount that was taken from them by the tax hikes initiated under his father and President Bill Clinton.

What about Al Gore's plan? It defies easy analysis--because the vice president has not released details of his cost estimates, and because his proposals consist almost entirely of administratively complex tax credits that are very difficult to quantify.

Based on President Clinton's fiscal 2001 budget--from which most of Gore's program is derived--it appears the Gore individual income-tax cuts will be worth less than $30 billion a year. To give the vice president the benefit of a doubt, however, assume that his tax cut will have a fully implemented value of $50 billion a year in 2006. Relative to the national economy and federal revenues, this would be among the smaller tax cuts of the post-World War II era--roughly on a par with those enacted under Jimmy Carter.

Just about any tax cut, even Gore's, looks enormous if you snowball it over an entire decade. But this is a political campaign, for crying out loud, not a bill markup session of the House Ways and Means Committee. Tax cuts should be explained and debated in the same context that most Americans actually pay taxes--one year at a time.