Commentary | Trade and Globalization

The Bush administration’s cut was extravagant, and federal dollars could be better spent elsewhere


Opinion pieces and speeches by EPI staff and associates.


The Bush administration’s cut was extravagant, and federal dollars could be better spent elsewhere.

by Max B. Sawicky

Close your eyes for a moment and allow me to transport you back to that time of economic bliss, January 2001.

The country has experienced a record surge of growth. Federal budget surpluses for the next 10 years are estimated at the colossal sum of $5.6 trillion. Some kind of big tax cut is a foregone conclusion. But suppose this serenity is disturbed by some clairvoyance. John Edward (the TV psychic, not the senator from North Carolina) makes contact with the spirit of Herbert Stein, a fine but regrettably deceased economist, and we learn that the projection of $5.6 trillion relies on overoptimistic economic assumptions. The correct projection is more like $4 trillion.

Duly chastened, we contemplate how to dispose of the still-quite-ample projected surpluses. How much to reduce the public debt, how much for tax cuts, and how much for new spending initiatives?

But our reverie is disturbed again. Dr. Stein informs us that a terrorist attack nine months hence will oblige us to commit additional resources for defense, homeland security and an invasion of Iraq.

By Congressional Budget Office estimates, the first two could amount to $500 billion. The president’s economic adviser says the Iraq mission could be $100 billion or $200 billion. We gulp, cross off $4 trillion and pencil in $3.3 trillion.

Then Dr. Stein reminds us of something tax economists had been pointing out for years: a provision of the federal individual income tax known as the alternative minimum tax, or AMT, is going to need fixing. The AMT is designed to collect a minimal amount of tax from relatively high-income persons who are able to claim a lot of itemized deductions.

The AMT is not indexed for inflation. Over the next 10 years, many more taxpayers who are not “rich” by any stretch of the imagination are going to find themselves owing AMT taxes. They will not be happy.

Fixing the AMT could cost $400 billion. “And,” Dr. Stein says, “you will need about $150 billion for so-called tax extenders — provisions of the tax code that are routinely renewed, but whose cost is not included in the surplus

“Oh, and by the way, the stock market is going to tank, and the recovery will be slow and mediocre.”

This is starting to feel like settling up your auto-repair bill with a garage mechanic named “Ace.” Our surplus has shrunk to $2.7 trillion or so. After seeing your expectations dashed, will you commit $1.6 trillion to a tax cut?

Fast forward to the present. A recession is afoot. Aren’t tax cuts helpful in dealing with unemployment?

Not necessarily. It depends on what kind, and when they take effect.

The tax cut passed in July 2001 was not designed to deal with recession. It was planned before any sign of recession had appeared. Its timing was also wrong.

To address a downturn, you need a temporary tax cut that takes effect quickly, in a big way.

The most useful part of the tax cut as far as stimulation goes was the famous $300/$600 rebate, but research suggests this wasn’t very effective either. People didn’t spend much of those rebates. They saved them instead.

Usually we can’t relive the past and undo our mistakes, but tax cuts are not written in stone. The future cost of the tax cut can be recouped by reverting to 2001 tax law. There are better uses for the money.

We could get a different type of tax cut, one with a lower total cost that is more equitable — that benefits working families more and relatively high-income taxpayers less. It should be easier to unmake a bad tax cut by replacing it
with a good one.

Or the federal government could do a lot more to bail the states out of their budget difficulties, averting state tax increases and service cuts. It could also help school districts cope with decaying infrastructure and rising enrollments.

Once the recovery begins in earnest, unemployment should drop markedly. That will be the time for using part of the surplus to reduce the federal debt.

Today is not too late to benefit from our new understanding of the budget outlook. When the 2001 tax cut was enacted, it was an extravagance. Now it has become positively frivolous, not to mention a genuine threat to the
ability of the federal government to function.

If we were to ask Dr. Stein whether we will make the right decision, he might say, “If something can’t happen, it probably won’t; if something must happen, chances are it will.”

Max B. Sawicky is a senior economist at the Economic Policy Institute.


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