[Congressional Record Volume 141, Number 187 (Monday, November 27, 1995)]
[Senate]
[Pages S17522-S17524]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




    CONCERNING LONG-TERM DEFICIT IMPLICATIONS OF REPUBLICAN TAX CUTS

  Mr. MOYNIHAN. Mr. President, just prior to the Thanksgiving recess, 
the Republican conferees for the budget reconciliation bill agreed to a 
7-year deficit reduction plan that included a tax cut purporting to 
cost $245 billion. The Democratic conferees were excluded from all 
deliberations of the conference.
  I have previously expressed my concern about tax cuts of this 
magnitude in the face of annual deficits and the accumulated national 
debt. The conference agreement falls far short of paying for these 
cuts--the tax cuts will cause the cumulative deficit to increase over 
the next 7 years by $200 billion more than it would without them. We 
will be forced to borrow to pay for them. When one considers the fact 
that elsewhere in the Republican budget agreement taxes are being 
raised on families making $30,000 or less, we see that there is very 
curious social policy being advanced as well.
  Today, however, I would like to focus on another troubling aspect of 
these tax cuts. The true cost of the cuts explodes once you get beyond 
the initial 7 years that are counted for estimation purposes. The cost 
of several of the tax cuts doubles or triples when you include the 8th, 
9th and 10th years, as compared to the first 7. This is no accident. 
The tax cut provisions are deliberately crafted so that their true 
costs do not begin to show up until after the initial 7 years. That 
way, they do not show up in the 7-year plan to balance the budget. 

[[Page S 17523]]

  The magnitude of the out year costs can be found in figures provided 
to me by the Joint Committee on Taxation, dated November 16, 1995. When 
the majority released their conference agreement on the deficit 
reduction bill, they provided revenue tables that covered only the 
first 7 years. I asked the Joint Tax Committee staff to provide figures 
showing the revenue effect of the tax cuts for an additional 3 years 
beyond what had previously been disclosed. That is, for the first 10 
years after enactment.
  What is shown on these 10-year revenue estimates is astonishing.
  The analysis provided by the Joint Tax Committee shows that the total 
cost of the tax cuts starts out at $245 billion over the first 7 years, 
but then in the short span of the next 3 years another $171 billion is 
added. The average annual revenue loss is about $35 billion over the 
first 7 years, but rises to an average of $57 billion per year for the 
3 years after 2002.
  Three provisions, in particular, stand out. First, the cost of the 
capital gains cuts for individuals more than doubles over 10 years, as 
compared to the cost for the first 7 years--from $28.8 billion to $70 
billion. Second, the expansion of individual retirement accounts 
[IRA's] in the bill costs $11.8 billion over 7 years, but nearly 
triples to $32.5 billion when you include the 3 years after 2002. 
Third, the cost of reductions in the estate tax more than doubles from 
$12.3 billion over 7 years to $25.5 billion over 10 years. Other 
provisions that show rapid out year growth include the reduction in the 
marriage penalty on couples filing joint returns and the expansion of 
the self-employed health insurance deduction.
  In part, the explosion in the long-term revenue costs of these tax 
cuts results from the attempt to hide their true impact, by drafting 
them so that they do not take full effect until after the 7-year budget 
window is closed. Possibly the most egregious example is the provision 
that permits indexing of capital assets. Under this provision, 
taxpayers can exclude from their taxable income capital gains on 
qualifying assets resulting from inflation after calendar year 2000. To 
qualify, an asset generally must be purchased after 2000 and be held 
for over 3 years. Thus, the revenue cost of indexing does not show up 
until 2004 and thereafter, that is, conveniently outside the 7-year 
budget window.
  The indexing provision, however, would permit taxpayers to treat 
assets purchased prior to 2000 as newly purchased assets eligible for 
indexing if they elect to pay taxes on the appreciation in the assets 
at the time of the election. This results in a speedup of tax revenues, 
allowing the Republicans to score about $10 billion of accelerated tax 
revenues inside the last 2 years of the budget window.
  The 10-year revenue numbers evince an effort by the right to starve 
the beast--that is, to cut off funding for the Federal Government. The 
extreme growth in revenue loss outside the budget window is ominous 
because the spending reductions in the bill are far from certain to 
occur. A recent Washington Post editorial entitled ``Time Bomb in the 
Budget'' states:

       . . . the deeper the ultimate tax cuts in the plan, the 
     deeper the spending cuts must also be to keep up. And some of 
     these spending cuts are too deep to sustain. The focus in the 
     fight thus far has almost all been on what would happen in 
     the first 7 years of this plan. That's fine, but it makes no 
     sense to solve a problem in that period only to begin to 
     create it all over again immediately thereafter.
       Mr. Moynihan's 10-year chart is a useful warning. The 
     government shouldn't be mortgaging its future by cutting 
     taxes that in the long run it will need to fulfill its basic 
     responsibilities.

  Mr. President, I ask unanimous consent that the entire text of this 
editorial be printed in the Record, along with another article on this 
topic from the Washington Post, dated November 23, 1995.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

               [From the Washington Post, Nov. 22, 1995]

                        Time Bomb in the Budget

       The tax cuts and some of the spending cuts in the 
     Republicans' seven-year package would ultimately be much 
     larger than the official estimates suggest. That's because as 
     they were written their full effect would not be felt until 
     after or near the end of the seven-year period for which the 
     estimates were made.
       These delayed-action mechanisms should be an issue in the 
     talks about the begin between the president and Congress. You 
     cannot achieve a better balance between the resources and 
     responsibilities of the government with these slow-developing 
     tax cuts whose long-term effect would be to create a new 
     imbalance. It was known all along that some of the tax cuts 
     in the plan were backloaded. In the House-Senate conference 
     they became much more so. Sen. Daniel Patrick Moynihan asked 
     the staff of the Joint Tax Committee for long-term estimates 
     of how the bill would affect revenue, not just for seven 
     years but for 10. In the 10th year the diminution of revenue 
     caused by these tax cuts would be 75 percent greater than in 
     the seventh year; that's how much of the full cost the tax-
     writing committees postponed.
       Most of the postponement would come in capital gains. The 
     conferees agreed not just to cut the capital gains tax but to 
     begin adjusting gains for inflation, so that when an asset 
     was sold the government would tax only the increase in value 
     in excess of the inflation rate. The inflation adjustments 
     wouldn't begin until the year 2001, however. That and other 
     steps conceal their cost. The tax cut to end the so-called 
     marriage penalty on two-earner couples filing joint returns 
     was also largely delayed until the period 2003 to 2005, and 
     there are other examples.
       A lot of the spending cuts in the plan have been backloaded 
     all along as well. Medicaid may be the best example. The cut 
     in projected spending for the full seven years--all seven 
     combined--would be 17 percent; that is the figure most often 
     cited. But it is misleading, because the cuts in the early 
     years would be small and grow progressively larger. By the 
     seventh year the cut on an annual basis would amount to 28 
     percent.
       Nor does even that do justice to what might happen to the 
     program, it turns out. That's because the conferees also 
     eased the rules governing how much states would have to spend 
     to qualify for their federal funds. If hard-pressed states 
     were to spend the least they could and still quality for 
     their full federal grants, the federal and state governments 
     together by the seventh year would be spending 35 percent 
     less than under current law.
       That would be a devastating cut--but the deeper the 
     ultimate tax cuts in the plan, the deeper the spending cuts 
     must also be to keep up. And some of these spending cuts are 
     too deep to sustain. The focus in the fight thus far has 
     almost all been on what would happen in the first seven years 
     of this plan. That's fine, but it makes no sense to solve a 
     problem in that period only to begin to create it all over 
     again immediately thereafter.
       Mr. Moynihan's 10-year chart is a useful warning. The 
     government shouldn't be mortgaging its future by cutting 
     taxes that in the long run it will need to fulfill its basic 
     responsibilities.
                                                                    ____


               [From the Washington Post, Nov. 23, 1995]

          GOP Tax Plan Costs Soar After Budget-Balancing Year

                           (By Clay Chandler)

       A handful of tax provisions in the Republican budget plan 
     explode into huge revenue losers after the 2002--Congress's 
     target year for a balanced budget--threatening prospects for 
     maintaining zero deficits without further spending cuts.
       According to projections by the Joint Committee on 
     Taxation, Congress's nonpartisan tax analysis group, the GOP 
     plan would lower federal revenue by an average of about $35 
     billion annually between 1996 and 2002. But the average 
     annual revenue loss would jump to $57 billion in the three 
     subsequent years, according to the agency.
       The plan provides $245 billion in tax breaks over the next 
     seven years and would cost a total of $416 billion in lost 
     revenue over 10 years, the committee said.
       Clinton administration officials and some private budget 
     analysts have seized upon the estimates--which were provided 
     by the Joint Committee on Taxation at the request of the 
     Senate Finance Committee's ranking Democrat, Daniel Patrick 
     Moynihan (N.Y.)--as evidence that the GOP tax proposals were 
     crafted to hide their true cost.
       To maintain a balanced budget after 2002, deeper cuts in 
     projected federal spending would be required beyond those 
     outlined in other parts of the reconciliation bill.
       A budget plan with a tax cut that would ``explode in the 
     last three years of a 10-year period has got to be viewed as 
     an unwise policy decision,'' Treasury Secretary Robert E. 
     Rubin said at a breakfast meeting with reporters yesterday. 
     He denounced the Republican tax proposals as ``enormously 
     outsized.''
       President Clinton is expected to veto the legislation.
       The GOP plan is riddled with ``gimmicks--the sole purpose 
     of which is to mask the trues cost of tax breaks in the 
     seven-year period,'' said the liberal Center for Budget and 
     Policy Priorities in an analysis released Tuesday.
       In unveiling their reconciliation package last week, 
     congressional Republicans stressed that the single largest 
     item in their package of tax cuts is a proposal to grant 
     parents a $500 tax credit for each child.
       With the addition of several other proposals--including a 
     reduction in the ``marriage penalty'' on couples filing joint 
     returns, a credit for parents who adopt, and a deduction for 
     long-term health care--the ``pro-family'' provisions in the 
     tax package accounted for 73 percent of the total cuts, the 
     Republicans said.

[[Page S 17524]]

       But critics claim the Joint Committee on Taxation's 
     projections show the pro-family component is a much smaller 
     part of the GOP tax cut over the longer term.
       And opponents of the GOP plan claim much of the extra 
     revenue loss would come from two items that primarily benefit 
     upper-income families: a proposed cut in the tax rate for 
     capital gains, or income from the sale of stocks, property 
     and other assets; and new incentives for savers using 
     individual retirement accounts (IRAs).
       To understand why the cost of the GOP tax cut would rise in 
     the years following 2002, consider the structure of the 
     proposed capital gains tax cut. The reconciliation plan 
     includes an ``indexing'' provision that would allow investors 
     to subtract from their taxable income capital gains resulting 
     directly from inflation beginning in 2001.
       But in its first year, the indexing provision includes what 
     analysts at the Center on Budget and Policy Priorities decry 
     as a ``gimmick.'' It would allow taxpayers to consider assets 
     they already hold as ``new'' assets eligible for indexing the 
     following year if they pay taxes on their capital gains 
     earned until that point.
       The change would yield a one-time-only revenue increase of 
     about $10 billion in fiscal 2002, the year the budget is 
     supposed to reach balance. But that revenue only represents 
     taxes the Treasury would have claimed the following year. 
     Over the long term, indexing is a big revenue loser, the 
     liberal analysts said.
       The Joint Committee's figures suggest revenue loss from all 
     the capital gains tax cuts advocated by Republicans could cut 
     Treasury revenue more than $100 billion in the seven years 
     after 2005, the liberal analysts said.
       Similarly, revenue loss from GOP tax provisions aimed at 
     widening participation in tax-favored IRAs would average 
     about $1.7 billion between 1996 and 2002, under the GOP 
     reconciliation bill. But in the three years thereafter, 
     revenue loss would snowball, averaging $6.9 billion each 
     year, the committee estimates.
       One reason the IRA provisions might lose revenue at a 
     faster rate after the seven-year budget period is that the 
     GOP bill establishes ``back-loaded'' IRAs. People who open 
     the new accounts would be taxed on initial contributions, but 
     not on accumulated interest or withdrawals for retirement, 
     new home purchases, education expenses and other uses. In 
     traditional IRAs, the initial contribution is tax-deductible, 
     but withdrawals are taxed.
       Analysts expect the withdrawal rate for the new IRAs to 
     increase after 2002, as cash builds up in the accounts and 
     participants tap their tax-free gains for a multitude of 
     uses, including retirement. The tax-free withdrawals cost the 
     Treasury revenue it would have otherwise received if the IRAs 
     were structured the traditional way.
       Moreover, the bill gradually allows people with higher 
     incomes to establish the accounts, with the top income level 
     not allowed in until 2007, thus masking the total cost of the 
     new IRAs in the long run.
       The GOP plan also includes a four-year ``rollover'' 
     provision that would allow money in traditional IRAs to be 
     shifted into the new, backloaded accounts, provided the 
     holder pays taxes immediately on current gains. That funnels 
     extra income that would have been collected in the future 
     into Treasury's coffers during the next seven years, thus 
     lowering the apparent cost of the tax benefit.

  Mr. THOMAS addressed the Chair.
  The PRESIDING OFFICER. The Senator from Wyoming is recognized.

                          ____________________