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The Tax Cut
with Robert Bixby
Concord Coalition Executive Director
Monday, Sept. 10, 2001; 11 a.m. EDT
Was the Bush tax cut a good idea? What components of the bill will likely be changed in the coming years? What is the Alternative Minimum Tax and why will it likely negate the tax breaks for millions of Americans?
Concord Coalition Executive Director Robert Bixby will be online to discuss the recent tax legislation and its nuances.
The Concord Coalition describes itself as, "a nonpartisan, grassroots organization advocating fiscal responsibility while ensuring Social Security, Medicare, and Medicaid are secure for all generations."
A transcript follows.
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New York, N.Y.:
Does a president, any president, really control the economy? Or are these trends basically cyclical in nature, and something that just works itself out over time?
Robert Bixby: President's don't control the economy although prudent fiscal policies can help and important policies can have a bad effect. Overall the economy does move in cycles and so politicians have limited options for having a short-term impact. That means it is not possible for them to enact policies that would quickly turn a recession into a boom or vice versa.
Boston, Mass.:
How much has the bombastic tone from OMB contributed to the current mess? Seems to me that Mitchell Daniels is among the Office's more passionately partisan directors... never wise for a person whose fate relies on economic projections.
Robert Bixby: Keep in mind that the Office of Management and Budget works for the president and obviously has an interest in promoting the president budget and economic policies. The OMB, unlike the CBO, is not designed to be a neutral player in budgetary debates. For that reason OMB directors often get involved in partisan squabbling. While I have not agreed with all of his policies, I haven't noticed that Mitch Daniels is any more partisan than most OMB Directors.
Philadelphia, Pa.:
The Bush tax cut was a good thing. However I don't think it went far enough. Even though I work for the Federal Government, I think it is outrageous to have such large surpluses due to high taxes. Do you think that another tax cut is coming and why do the congressmen beleive that they have to have a lage surplus in order to operate the government. After all, we working stiffs have to make ends meet and not do with some things all the time, don't you think government should work the same way?
Robert Bixby: Given the bipartisain commitment to exclude the Social Security surplus from budget calculations it seems unlikely that there will be any additional tax cuts enacted this year, aside from a very minor one year extension of some expiring tax breaks. Virtually all of the projected surplus for the next five years comes from the surplus in Social Security. As a nation we have made a deliberate decision to run a Social Security surplus in advance of the baby boomer's retirement to help set aside money for this major expense, much like a family would prepare for sending their kids to college or for it's own retirement needs. So, it is appropriate not to dip into this money to run the routine operations of the government. Because the payroll tax is deliberately set at a higher level than is needed to fund today's social security benefits, using that extra money for routine expenses of government is a back door means of keeping income taxes lower than they otherwise would be. Since the payroll tax is not as progressive as the income tax, this amounts to giving upper income taxpayers a break by funding more of government through the less progressive payroll tax.
Your question is a very good one and it gets to the fundamental issue of why we should be running surpluses in advance of the huge retirement and healthcare cost of the coming senior boom. We should be using that money for savings (i.e. debt reduction ) or a prefunding of the Social Security system through market investments and not for current consumption.
That having been said, no one should get too bent out of shape if in a slow economy we end up having to use some of the social security Surplus. Certainly on a short term basis this is not a problem. But it would be a problem if we return to the old practice of routinely using it for other purposes.
Iowa City, Iowa:
I've often read in the papers that the debt is $3.4 trillion. Yet
according to the Dept of Treasury website, it's around $6 trillion. Which
is correct?
Robert Bixby: Both numbers are correct.
The $3.4 trillion represents the debt that the government owes to its outside creditors. In addition the government also owes a couple trillion dollars to its own trust funds, the largest of which is social security. If you add these two together you come out with the gross national debt which is close to the $6 trillion figure you mentioned.
Bethesda, Md:
One viewpoint of the current situation would be to stimulate the economy by increasing government spending. Do you think that this is a valid viewpoint?
Robert Bixby: It is at least as valid as trying to stimulate the economy by giving tax rebates. Both attempt to pump up spending, although the rebates put this choice in the hands of individuals. The bottom line however is that fiscal stimulus of any sort is likely to have limited short term effects. Broader economic factors will determine when the economy begins to grow again on a more robust basis.
Indianapolis, Ind.:
Mr. Bixby, This report from the Washington Post by Charles Babington says that ALL the tax cuts in the 1.35 Trillion dollar tax package are assumed to reverse themselves in about 10 years or so.
AND this assumption was included as part of the President's own budget forecast? Do I understand this article correctly? Does this mean President Bush actually assumed his own tax package will be reversed in about 10 years and he used that assumption in order to "make the numbers work?"
Surely, this is not true.
Robert Bixby: Indeed it is true, although the sunset provision was not something proposed by President Bush. It was added to the package by Congress. The reason for the sunset provision has to do with a rule in the United States Senate called the Byrd Rule, which mandates that certain legislation should not have an adverse impact on the surplus beyond ten years. It requires 60 votes to wave the Byrd rule to make tax cuts, or for that matter new mandatory spending provisions, permanent. Since the tax package could not get 60 votes, the Senate included the sunset provision and even went one step further by assuming that the tax cut would expire not in the 10th year, but in the 9th i.e. 2010. This fiction allowed Congress to essentially pass a larger tax cut than the official scoring would indicate because the official scoring now assumes that the entire cost of the tax cut will expire in nine years, whereas no one believes that would actually happen.
To get an idea of the bizarre effect this sunset provision has on budget projections, consider that fully one third of the projected non Social Security surplus over the next 10 years now comes in the last year of the projection, in 2011.
Boston, Mass.:
There is some talk about additional tax cuts to stimulate the economy. In particular, house republicans are talking about a capital gains cut, I think from 20% down to 15%. It would seem to me that the stimulus would be pretty minimal from this approach. When cap gains has been cut before, from 70% down to 28% in the late 70s (I think I have the rates right), the return on a gain went from 30 cents on a dollar to 72 cents, or about 140%. What the house is talking about is to go from 80 cents to 85 cents, or roughly 6%. how would this dramatically change investor behaviour? Would more effective stimulus be created be swapping some of the out year tax cuts for wealthier individuals for short term payroll tax relief?
Robert Bixby:
It does seem unlikely that this sort of cut in the capital gains tax would provide a major boost to the economy, although it might well bring in additional revenues in the next couple of years in the short term which would possibly allow politicians to claim that they had avoided dipping into the Social Security surplus. When viewed in that light, the proposal looks more like a budget gimmick than tax policy. It seems likely that business will begin to invest again and spend again when the likely return on that investment excluding tax considerations improves. The slight reduction in the capital gains tax that has been proposed does not seem likely to induce businesses to change their behavior.
the District:
Dear Mr. Bixby:
I heard something shocking this weekend: that those (tiny) tax rebate checks we just got in the mail from the government are actually not rebates at all! That the money they are giving us will actually be deducted from our rebate checks NEXT year. Could that possibly be true, and if so how did Bush get away with that? And also, since most of the so-called tax breaks won't come into play until 2010, won't that likely change once Bush is out of office?
Thanks.
Robert Bixby: The tax rebate checks are based on a retroactive adjustment of tax rates to the beginning of the year. So in that sense they are an advance on what would otherwise be coming to you next spring. It doesn't make you any worse off.
Your other question raises a very interesting aspect of the tax cut. Much of the tax relief is not scheduled to go into effect until after 2004 and some of it will not go into effect until after 2008, when President Bush will have left office even if he serves two terms. There will also be several congressional elections that will take place in the interim, meaning that it is far from clear whether much of this tax cut will actually go into effect.
Arlington, Va.:
For its first Budget, the Clinton Administration went out of their way to emphasize they were using ultra-conservative economic assumptions for their forecast, so they could only be pleasantly surprised. Do you think the Bush administration went completely the other way with their tax cut? Are they reckless?
Robert Bixby: I don't think the economic assumptions contained in the Bush budget were reckless, they seem to be in line with what most economic forecasters were predicting at the time. However, I do think that the plan to enact a large escalating tax cut based on highly speculative budget projections was not responsible fiscal policy. It is one think to make ten year projections about where the economy and budget are headed. These can be useful to give a sense of where current policy will lead us. It is quite another thing to make permanent commitments based on those ten year surplus projections which everyone concedes are highly uncertain.
Greenville, S.C.:
Some members of Congress have suggested across the board cuts in government spending. What effect do you think this plan would have on economic recovery?
Robert Bixby: It would have no effect on economic recovery. The amount involved - roughly $9 billi0n - in a $10 trillion economy is nothing more than a rounding error. It may, however, be useful as a symbolic device to avoid dipping into the Social Security surplus. This would show a commitment to fiscal restraint on the part of congress.
Robert Bixby: The current dust up over whether we will dip into the $9 billion Social Security surplus this year is not as important as important as making sure that we have a long term sustainable fiscal policy. A small dip into the Social Security surplus is an excusable breach in the lock box in a slow economy, but it should not be used however as an excuse to abandon the fiscally responsible goal of balancing the budget excluding the socially security surplus. What is important is developing a long-term fiscal policy, keeping in mind the huge fiscal challenges that lie just ahead when the baby boomers begin to collect Social Security and Medicare. The problem, in other words, is not the $9 billion dip in the trust fund, but the $9 trillion dollar unfunded liability of Social Security.
washingtonpost.com:
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