In a policy report published on
February 6, 2001, Robert Greenstein of the Center on Budget and
Policy Priorities (CBPP) claimed that President Bush's tax cut plan
would "cost" the federal Treasury $2.5 trillion over the 11-year
period 2001 through 2011. That sum is $1.2 trillion more than
Congress's Joint Committee on Taxation (JCT) estimated the plan
will save taxpayers and $900 billion more than the tax relief
estimated by the President's own economists.1
The problem is that the CBPP analysis
assumed features of the Bush plan that are not in it and assumed
also that the economy would not respond to the largest tax cut in
20 years. Table 1 shows what the CBPP included to arrive at its
cost of President Bush's tax proposal. It also compares those costs
to estimates of taxpayer savings made by the Center for Data
Analysis (CDA) of The Heritage Foundation.
Comparison of CBPP & Heritage's Tax Plan Estimates2
(in trillions of dollars)
What does the CBPP do to arrive at
these estimates, and how are they different from Heritage's work
and the estimates of the economists at the Joint Committee and the
The JCT estimated
the cost of the plan over the period 2001 through 2010. The CBPP
estimates cover the period 2002 through 2011, and the larger tax
base in 2011 adds to the revenue impact of the plan (around $200
billion). The CDA estimates are $60 billion less, or $140
argues that the entire tax system will have to be fixed for growth
in the Alternative Minimum Tax, since it is expanding beyond
anyone's expectations. So, he adds an additional $200 billion to
the cost of the Bush plan for adjusting the incidence of the AMT.
But the Bush plan does not include such a provision. The CDA
estimates only reflect what President Bush has actually proposed.
Mr. Greenstein, however, has included this provision as though it
were part of the President's plan.
under President Bush's plan mean to the CBPP that debt service
costs will rise because less publicly held debt will be retired.
Thus, Mr. Greenstein adds $400 billion to the 10-year cost to cover
higher than expected interest costs. The CDA dynamic estimate of
$940 billion, however, contains debt reduction and debt service
costs associated with the tax plan. Interestingly, the adoption of
President Bush's tax plan adds only one more year to the time
needed for all publicly held debt to be paid back.
The CBPP adds another $400 billion
for making the tax cut retroactive, despite the fact that President
Bush's plan currently contains no retroactive components. Some
politicians do recommend making portions of the tax plan effective
from January 1 of 2001. Thus, the CBPP is right in assuming that a
retroactive version of the plan would cost more than the one the
President just sent to Congress. However, it is wrong to assume
that every provision would be fully effective on January 1, 2001,
and that none of the provisions would be phased in.
If the plan becomes law on July 1 and
its tax rate, marriage penalty, child tax credit, and charitable
deduction provisions are made effective beginning on January 1,
then several revenue changes occur. First, withholding schedules
are changed, which reduces collections for one quarter in fiscal
year 2001 (the third calendar quarter) and the first quarter of
fiscal year 2002 (the fourth calendar quarter of 2001). Second,
quarterly taxpayers may file amended returns for the first two
quarters of calendar year 2001 that might reduce collections in the
third and fourth calendar quarters of the year. Third, regular
taxpayers will file their final returns after January 1, 2002 and
claim refunds for overpayment of taxes in 2001. The CDA estimates
that these changes lower revenues by an additional $163 billion in
2001 and 2002.
Finally, the CBPP assumes that the
economy does not react at all to the largest tax cut in 20 years.
Thus, the 10-year JCT score (itself a nearly static estimate of the
tax plan) contains no economic feedback. The CDA estimate begins
with a static tax estimate of $1.7 trillion over 10 years but then
makes the very reasonable real-world assumption that taxpayers will
react to lower taxes on their labor and capital. Thus, the "cost"
of the tax plan after a stronger economy has increased the tax base
of wages and salaries is estimated at $940 billion, or 55 percent
of the CDA's static estimate.3
1. Robert Greenstein, "Cost of the Bush
Tax Cut Rises: Making Rate Cuts Retroactive Adds $400 Billion,"
Center on Budget and Policy Priorities, February 6, 2001.
2. The Heritage
Center for Data Analysis follows the practice of estimating changes
in revenues first with a static model and then with a behavioral
model that uses output from the static model as its starting point.
The difference between the Heritage static and dynamic totals in
Table 1 reflect the economic reflows to the tax base, and thus to
3. For details
on the CDA analysis of President Bush's tax plan, see D. Mark
Wilson and William W. Beach, "The Economic and Budgetary Effects of
President Bush's Tax Relief Plan, " Heritage Foundation Center
for Data Analysis Report, No. 01-01, February 19, 2001.