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WAR, TAX CUTS, AND THE
DEFICIT
Center for Budget Priorties
By Richard Kogan
July 8, 2003
For months, analysts have been saying that the deficit
for the current year is likely to hit $400 billion and that the
deficit for the coming year, fiscal year 2004, will likely be
even higher. Recently, the Congressional Budget Office
confirmed the first of these fears, writing, "[we now
project] that the federal government is likely to end fiscal year
2003 with a deficit of more than $400 billion, or close to 4
percent of gross domestic product.'[1]
On April 24, the President said in a speech in Canton, Ohio
that the war and the recession caused those deficits. He
declared "Now, you hear talk about deficits. And
I'm concerned about deficits. I'm sure you are
as well. But this nation has got a deficit because we have
been through a war.' Three sentences later, the
President added: "And we had an emergency and a
recession, which affected the revenue growth of the U.S.
Treasury.'[2]

Yet the cost of war, though by no means trivial, is
responsible for only a small share of the deficits we face.
The President's tax cuts are a much more significant
cause. Congressional Budget Office data indicate that in
2003 and 2004, the cost of enacted tax cuts is almost three times
as great as the cost of war, even when the cost of increases in
homeland security expenditures, the rebuilding after September
11, and other costs of the war on terrorism — including the
action in Afghanistan — are counted as "war
costs,' along with the costs of the military operations and
subsequent reconstruction in Iraq. Table 1 provides the
budget data that documents this fact.
$4.1 Trillion in Deficits Over Ten
Years? |
Earlier this month, we issued an analysis finding that if the
current tax cuts are extended and other likely costs occur, the
deficits over the ten-year period 2004-2013 will total $4.1
trillion.* The figures used in today's analysis and
in that analysis are consistent with each other. These
figures are based on the economic forecast CBO issued earlier
this year and the most up-to-date CBO estimate of revenue
collections for this year. The results of our analysis are
similar to those of other analysts; Goldman Sachs, for example,
recently projected that the deficit over the next ten years will
total $4.5 trillion.
* See $300 Billion Deficits, As Far As the Eye Can See, Center
on Budget and Policy Priorities, revised July 8, 2003, at
http://www.cbpp.org/7-2-03bud.pdf.
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The President's Canton speech is striking in
several other respects, in addition to his blaming the war for
the current deficits.
Table 1
How Projected Surpluses Turned to Deficits, 2003 and
2004
Difference between surpluses projected by the
Congressional Budget Office in January 2001
And deficits called for in new Congressional budget, in billions
of dollars |
|
2003 |
2004 |
Avg., 2003 & 2004 |
Distribution of legislative costs among categories of
legislation |
Surpluses projected by CBO, January 2001. |
360 |
395 |
380 |
|
Surpluses or deficits (-) if CBO had known in January 2001
about the recession and other changes in estimating factors
(other than legislation). |
-30 |
65 |
15 |
|
Cost of legislation enacted by Congress since 2001 (or very
likely to be enacted): |
-375 |
-515 |
-445 |
100% |
Tax cuts |
-205 |
-310 |
-255 |
58% |
Defense and non-defense budget increases except war
costss |
-80 |
-115 |
-95 |
22% |
War, including Sept. 11 recovery, homeland security
increases, Afghanistan, Iraq, and war on terrorism |
-90 |
-90 |
-90 |
20% |
Deficits (-) resulting from above costs |
-405 |
-445 |
-425 |
|
All figures are rounded
to the nearest $5 billion; columns may not add due to rounding.
Estimates of legislation enacted to date are from CBO.
All the 2003 costs and 93 percent of the 2004 costs shown
in this table derive from legislation that is already enacted.
Amounts assumed but not yet enacted include the costs of
occupying Iraq in 2004 (we use an estimate of $18 billion), the
costs of other defense increases for 2004 based on the Bush
budget and an analysis of Department of Defense plans by the
Center for Strategic and Budgetary Assessments, the costs of
natural disasters in 2004 based on historical averages, and the
start-up costs of a prescription drug benefit. All
estimates of the cost of legislation include the resulting
increase in interest payments that is generated because budget
increases or revenue reductions cause the level of the debt
— and therefore the amount of interest payments on the debt
— to exceed projected levels. |
* The President declared
that "the minute I got sworn in, we were in a recession.
And that's why I went to Congress for a tax
package.' The first sentence is not accurate.
The recession dates from March 2001; both the economy and
the number of jobs continued to grow through March. (The
number of jobs has shrunk steadily since then.) Moreover,
the President's own economic advisers — and the
budgets he presented to the nation in February and April 2001
that contained his tax cut — projected continued healthy
economic growth: 2.4 percent for 2001 and 3.3 percent for 2002,
for example.[3]
* How about the President's
claim that he requested his tax cut because of the (pending)
recession? The tax-cut package the President requested
early in 2001 was virtually identical to the tax package he had
campaigned on for more than a year, during boom times. It
strains credulity to believe that the tax package he first
unveiled in 1999 when he was facing Steve Forbes and John McCain
in the Presidential primaries was designed to respond to a
recession that started in March 2001.
* In his Canton speech, the President
also blamed Congress for phasing in the tax-rate reductions,
estate tax repeal, and other aspects of the 2001 tax cut that he
signed into law. After saying that he went to Congress for
his tax package because the minute he was sworn in, we were in a
recession, the President continued: "And Congress
responded, but the problem is they responded with a phased-in
program. They said tax relief was important and tax relief
should be robust, but they phased it in over a number of years
— three years in some cases, five years in others, and
seven years. Listen, all I'm asking Congress to do is
to take the tax relief package they've already passed,
accelerate it to this year so that we can get this economy
started and people can find work.' The President is
re-writing history here, as well. It was the President who
asked Congress to phase in most of the tax cuts over five years,
both when he first unveiled his tax-cut plan in 1999 and again
when he laid it out in detail in his first budget, in February
2001.[4] (Moreover, it was Congress, not the President,
that accelerated the creation of the new 10 percent income-tax
bracket into 2001, thereby creating the $300/$600
"rebates' to respond to the slowing economy.)
* In his Canton speech, the President
stated that the first way to deal with the deficit is to
"increase revenues to the Treasury through economic growth
and vitality.' His budget and the congressional
budget plan call for major additional tax cuts, however, causing
revenues to decline rather than grow, relative to current
projections. His own budget acknowledges this; it shows
that his tax cuts will increase the deficit substantially, not
reduce it.
Estimating the Costs of
the War on Terrorism |
In estimating the costs of the war, we have
defined the costs broadly, to cover not only military operations
in Afghanistan and Iraq, but also homeland security and other
anti-terrorism costs in the U.S. and abroad and the costs of
reconstruction, victims' compensation, and airline
subsidies after the September 11, 2001 attacks.
Specifically, we have included: the $40 billion emergency
supplemental appropriations enacted immediately after the events
of September 11, 2001, which includes cleanup and reconstruction
in New York and Washington; the airline relief and victims'
compensation measure enacted immediately after September 11; the
emergency supplemental appropriations bill enacted in the summer
of 2002 (covering additional costs in Afghanistan and as well as
some homeland security); the $10 billion in contingency defense
appropriations added to the 2003 omnibus appropriations bill this
February; the recent $79 billion Iraq/terrorism supplemental
appropriations bill; and the increases in homeland security
funding enacted in regular appropriations bills. In all but
the last case, CBO has supplied the estimate of year-by-year
expenditures flowing from this funding. In addition, we
assume $18 billion for the costs of occupying Iraq in 2004.
The actual costs could vary widely; the figure used here is
half the monthly $3 billion cost that is currently being
incurred. Finally, have included the higher debt service
costs resulting from these pieces of legislation.
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Table 2
Expenditures for War since September 11, 2001
CBO estimates in billions of dollars
|
|
2001 |
2002 |
2003 |
2004 |
'01-‘04 |
$40 billion emergency supplemental appropriations, fall
2001* |
0.1 |
21.8 |
9.9 |
4.6 |
36.1 |
Airline relief / victims' compensation and U.S. Patriot
Act, fall 2001 |
2.5 |
5.7 |
2.7 |
-0.2 |
10.7 |
Emergency supplemental appropriations bill, summer 2002 |
|
5.9 |
5.9 |
5.9 |
19.1 |
$10 billion defense "contingency," 2003 omnibus
appropriations |
|
|
5.9 |
3.1 |
9.0 |
$79 billion Iraq/terrorism supplemental appropriations, April
2003 |
|
|
42.0 |
27.3 |
69.3 |
Homeland security increases (above 2001 baseline) in regular
appropriations bills** |
|
2.8 |
18.7 |
23.3 |
44.8 |
Assumed costs for occupation of Iraq in 2004 |
|
|
|
18.0 |
18.0 |
Debt service on all the above |
0.0 |
0.7 |
3.5 |
8.4 |
12.5 |
TOTAL |
2.6 |
36.9 |
91.5 |
88.7 |
219.6 |
*Also include $0.5
billion in the DoD Counter-terrorism transfer fund enacted in the
regular 2002 Department of Defense appropriations bill. **Based
on figures from the Center on Strategic and Budgetary
Assessments. Columns may not add due to rounding. Estimates for
the first three items were published by CBO in a letter to Rep.
John Spratt, August 29, 2002. Some of the funding enacted (or
assumed to be enacted) through 2004 will be expended in years
after 2004. |
Revenue losses from new tax cuts are inevitable unless
the tax cuts would somehow trigger so much economic growth that
the Treasury would collect more revenues than it would otherwise
have done. No reputable analyst believes this will occur;
history and economic analysis demonstrate conclusively that
cutting taxes substantially results in large reductions in
revenues. Indeed, this year's Economic Report of the
President, which President Bush signed, states that
"although the economy grows in response to tax reductions
(because of higher consumption in the short run and improved
incentives in the long run), it is unlikely to grow so much that
lost revenue is completely recovered by the higher level of
economic activity.'[5] In addition, an impressive
array of analyses from the Congressional Budget Office, the Joint
Committee on Taxation, the Committee for Economic Development,
economists at the Brookings Institution, economists at the
Federal Reserve Board, and other analysts and institutions have
concluded that the tax cuts proposed now or enacted in 2001 will
have only a small effect on long-term economic growth, that these
small effects on growth could be either positive or negative, and
that the tax cuts will cause large increases in deficits.[6]
End Notes:
[1] Congressional Budget Office, Monthly Budget Review,
June 9, 2003.
[2] Statement of President Bush at the Timkin Company,
Canton, Ohio, April 24, 2003, p.7. Text available at
http://www.whitehouse.gov/news/releases/2003/04/20030424-3.html.
[3] Budget of the United States Government, OMB,
April 9, 2001, page 239. These rates represent the
predicted rate of real (inflation-adjusted) growth of GDP over
the course of the calendar year. Actual economic growth
proved to be 0.3 percent in 2001 and 2.4 percent in 2002.
[4] See OMB, A Blueprint For New Beginnings, Feb.
28, 2001, page 194, and Joint Committee on Taxation, JCX-31-01,
May 4, 2001. In the President's 2001 budget proposal,
no tax cuts were effective in 2001, most tax cuts were phased in
over the period 2002 through 2006, and the repeal of the estate
tax was phased in gradually through 2010.
[5] Economic Report of the President, February
2003, page 57/8.
[6] See Administration's Economic Growth
Claims Disputed by Broad Range of Economists, Center on Budget
and Policy Priorities, April 17, 2003. Also see Kogan, Will
the Tax Cuts Ultimately Pay for Themselves? and Will the
Administration's Tax Cuts Generate Substantial Economic
Growth, both Center on Budget and Policy Priorities, March
3, 2003.
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