CBO: Ending High-Income Tax Cuts Would Save Almost $1 Trillion

August 24, 2012 at 9:03 am

The Congressional Budget Office’s (CBO) new report shows that allowing President Bush’s 2001 and 2003 income tax cuts on income over $250,000 to expire on schedule at the end of 2012 would save $823 billion in revenue and $127 billion on interest on the nation’s debt, compared to permanently extending all of the Bush tax cuts.  Overall, this would mean $950 billion in ten-year deficit reduction, a significant step in the direction of fiscal stability.

Prior CBO analysis showed the minimal economic risk this would pose in the short-term.  CBO previously concluded that extending only the so-called “middle class” tax cuts on income below $250,000, instead of extending all of the tax cuts, would “be more cost-effective in boosting output and employment in the short run because the higher-income households that would probably spend a smaller fraction of any increase in their after-tax income would receive a smaller share of the reduction in taxes (relative to current law).”

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More About Chuck Marr

Chuck Marr

Chuck Marr is the Director of Federal Tax Policy at the Center on Budget and Policy Priorities.

Full bio | Blog Archive | Research archive at CBPP.org

7 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. MJS #
    1

    Having trouble understanding the data underlying this post. Using the CBO data in the August update to the budget projections, the year by year figures in the graphic above (totaling to $950B) appear to be the difference between the revenue & debt service impacts of 1) letting all the tax cuts expire and 2) letting the tax cuts expire only for income above the $200/250K threshold. The resulting $950B in saving therefore would appear to be the savings associated with allowing the tax cuts to expire only for those making less than $200/250K, but continuing the lower rates for those making above the threshold.

    Using 2013 as an example, the CBO projects savings from the expiration of all the tax cuts to total $247B, and savings from tax cuts only above the threshold $205B. The $42B difference appears to represent only the savings from allowing the tax cuts to expire for those making under the threshold, not over it.

    Seems like the actual figures starting in 2012 should be 205, 283, 314, 347, 388, 440, 494, 548, 608, 671, totaling 4,298.

  2. 2

    The claim that almost a trillion dollars would be save if the pre Bush Tax rate were allowed to expire for those making over $250.000 rest on one unmentioned assumption, i.e., that the government would not just spend the added revenue, if any, on new projects. It is also a static analyses which does not consider what steps those making more than $250.000 would do to minimize their tax burden, and I assure you that they would do everything allowed under the law, switching investment, starting trusts, etc.

  3. Fred #
    3

    I take it your derivation is from Table 1.5 on page 19 of the CBO report? Personally, I disagree with the assumption that extending the tax cuts for those with incomes under $250,000 will provide any sort of “boost” to the economy, as opposed to maintaining the current, muddled status quo. We should just take our medicine, meet the “fiscal cliff” head on, and allow the market to re-equilibrate, at which point, with public debt presumably under (much better) control, perhaps we can avoid all this sort of political nonsense going forward. And pigs will fly, I suppose.

    Philosphically, I am more in the “starve the beast” camp. There is way too much that is broken in Washington, and dangling the prospect of re-filled federal coffers before their eyes only encourages political patronage. As Bob implies, the nation as a whole makes a huge mistake in wishing for more and more instrusive federal government. Tyranny rears its ugly head under many guises. Rather, the Principle of Subsidiarity is implicit in the Constitution, and it should (again) be made paramount as government’s core principle.

  4. labman57 #
    4

    I continue to find it quite perplexing that so many conservative politicians who purport to have business/fiscal savvy insist that the national deficit is solely the result of excessive spending, and that huge tax cuts for the ultra-wealthy and gaping corporate tax loopholes are irrelevant to this issue.

    Reality check — The federal tax burden of the average American taxpayer is at its lowest in the past 30+ years. In addition, many corporations do not pay their fair share of taxes due to gaping loopholes that their well-paid tax attorneys are only too happy to exploit.

    The net effect has been a dramatic decrease in federal revenue, which has made a significant contribution to the current federal deficit and rising national debt. And yet, Republicans insist that additional tax cuts for corporations and the wealthiest Americans will somehow help to improve the national economy reduce the federal deficit.

    This would be akin to a CFO standing before the company’s investors at a stockholders meeting, attempting to convince the crowd that the reason why the company has not turned a net profit during the current fiscal year has nothing whatsoever to do with the fact that revenues are down 50%, and that the red ink is solely the result of too much overhead.

    Attempting to reduce the deficit (let alone balance the budget) without increasing federal revenues is banal, frequently regurgitated conservative talking point that virtually every established economist has denounced as pure ideological nonsense.

    The CFO would be pelted with moldy cabbages, so why aren’t the Republicans who make the same inane statements reeking of rotten vegetation?

    It’s not about whether or not to generate additional tax revenue. It’s all about which subset of Americans can provide the extra revenue with the least detrimental impact on their essential needs.

    • Greg #
      5

      http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200

      Federal revenues have not “dramatically decreased.” They are down slightly the past couple of years due to recession, which is predictable, but they’re moving back up. Meanwhile yearly spending just goes up and up, way over pop growth or inflation. Secondly, by using these numbers, without getting into any flaws, revenue will increase $950B over 10 years. Our deficit last year was $1.3T. So the money they get over the next 10 years, hypothetically if all of their assumptions hold, won’t even cover the deficit for one year. How can you still say it’s not a spending problem. Revenues for businesses go down in bad years. The difference is they cut their spending to match.
      Your arguments are based on the belief that all money belongs to the government and they just allow us to have some. How much tax revenue will be enough? We could tax the rich at 100% and it wouldn’t be enough, even given the ridiculous assumption that the tax base is some how static. Just because the government can think of ways to spend my money doesn’t mean they deserve it.

    • JackR #
      6

      “A dramatic decrease in federal revenue”? The total tax receipts for the feds in 2011 (the last year recorded) was $2,303.5 billion. For 2008 it was $2,524 billion. Hardly a dramatic decrease. During the same period spending increased from $2,982.5 in 2008 to $3,603.1 billion in 2011 (Source: Office of Management and Budget Historical Tables, Table 1.3). Now that might be considered to be dramatic. I suggest you read “Trickle Down Theory and “Tax Cuts for the Rich” by Thomas Sowell. It proves, with actual government records, that several times during the 20th century that when tax rates for the more well-to-do were lowered, not only did federal revenues increase, but the percentage of revenue that the rich paid actually increased. Sounds counter-intuitive, doesn’t it. Well, just remember that the economy is not a zero-sum game.

  5. Bob #
    7

    Forget entitlements. This could come in handy for waging more wars. We never seem to tire of them.



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