G-DAE Working Paper No. 03-01: “Read My Lips: More New Tax Cuts”
found in any other developed country. 19 In light of this reality, policies that decrease
economic inequality appear much more necessary than policies that further increase
inequality. Further, any federal tax cut will necessitate a reduction in spending unless it
is offset with tax increases in other areas.20 The Bush tax cut proposal is not revenue
neutral, as noted in the economists’ statement opposing the tax cut. This leads to an
important question that has not been addressed by the Bush administration - how will
federal spending be reduced to compensate for the tax cut?
While revenue reductions could be offset with increased borrowing in the short term,
permanent tax cuts will eventually impose fiscal constraints on the federal government.
Spending cuts could, of course, be prioritized in numerous ways. However, a particular
concern voiced by the Bush administration’s critics is that permanent tax cuts will
threaten the long-term solvency of the Social Security program. Currently, the largest
share of federal outlays (about 36%) is allocated towards Social Security, Medicare, and
other federal retirement programs. While the Social Security trust fund is currently
running a surplus, the aging of the U.S. population implies that the trust fund, without
revision, is not a permanent solution to the problem of funding Social Security. Large
permanent tax cuts only increase the likelihood that, eventually, Social Security benefits
will have to be cut as the trust fund is drawn down.
Unlike the case with dividend income, Social Security is an important source of income
to American seniors, particularly low-income seniors. Nearly 40% of all income received
by seniors comes from Social Security while less than 5% comes from dividends.21 Any
reduction in Social Security benefits, including increasing the eligibility age, is likely to
have a disproportionate impact on low-income seniors.
This leads to an ironic implication of the Bush tax cut. The tax cut, because it is revenue
reducing, poses an increased risk that Social Security and other federal retirement
benefits will have to be scaled back in the future. The President states that his tax cut
provides needed tax relief to America’s seniors. In the long run, it may be that low-
income seniors will suffer the most should dividend taxes be eliminated.
Brian Roach is Research Associate at the Global Development And Environment Institute
at Tufts University. He holds a Ph.D. in Environmental Policy Analysis from the
University of California, Davis.
19 World Development Indicators 2002, World Bank, Table 2.8, Available at
http://www.worldbank.org/poverty/data/2_8wdi2002.pdf.
20 A tax cut could, in theory, stimulate economic growth sufficiently such that federal revenues increase as
incomes and profits rise. This is the standard supply-side argument for tax cuts, used to support the Reagan
cuts in the 1980s. The historical result, however, was not rising revenues and surpluses, but rising deficits.
21 Money Income in the United States, 1999, Table 12.
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