Jobs and Growth Tax Relief Act of 2003 (cont.)

Mr. REED. Mr. President, we find ourselves here, yet again, confronted with the third tax cut package in 3 years from the President. As a recent Washington Post article pointed out, President Bush seems dead set on ramming through tax cuts every year he is in the Presidency—regardless of the economy, regardless of the budget deficit, regardless of its competition with much-needed programs like a universal and comprehensive prescription drug benefit for Medicare.

In fact, after years of harping on budget deficits, the Republican Party has now jettisoned its sense of fiscal responsibility, but only after President Clinton adopted that same fiscal responsibility and successfully delivered budget surpluses. Now, Republicans are silent on the issue.

But only when we put all of these concerns aside do we get to the most fundamental question—the question of fairness. President Bush has taken great strides to launch preemptive rhetorical attacks, claiming Democrats are engaging in class warfare with opposition to tax cuts. But when we consider the facts, it is the President who is engaging in class warfare by pushing through a package that steals from the poor and then gives to the rich. His preemptive rhetorical attacks will not measure up to the facts.

So, with all the challenges we have ahead, we are being asked to vote on another tax cut that will not help the average American family. It is incumbent on us to separate the myth of Republican rhetoric from reality in how this tax cut will affect our constituents, our families, and our country. It is time to set the record straight.

Myth 1: The Republican tax proposals are best at generating new jobs and promoting a strong sustainable recovery. The reality is that the Republican tax proposals are poorly targeted to the problems facing the economy. They generate fewer jobs and less economic growth this year when they are needed most than does the Democratic alternative.

The economy is in a slump now, with 2.7 million fewer private sector jobs than in March 2001, and even the Fed's outlook for the near future is weak.

Economic forecasters expect that the economy will eventually bounce back, but they have been expecting a recovery "soon" for over a year and it has not come yet. With the economy still in a slump, with excess unemployment and underutilized factories, the policy we need now is job-creating stimulus that restores full employment quickly.

Republicans still insist that long-term tax cuts for the wealthy somehow create jobs, despite the poor track record that 1.7 million jobs have been lost since passage of the 2001 tax cut. Their program is so backloaded that it doesn't take effect until past the time when it is needed. Such a policy is not just ineffective but counterproductive, because it creates large deficits and an increase in the public debt that is a drag on long-term growth.

Additionally, most of the Republicans' proposed capital income tax cuts reward capital owners without directly encouraging new capital formation or higher output. Such tax cuts can't be expected to create new jobs if they don't encourage output. In fact, to the extent that the tax cuts effectively reduce the cost of capital facing businesses, some businesses may be encouraged to substitute capital for labor without increasing their output, so that jobs are lost rather than gained. If the goal of the tax cut is really job creation, the tax cuts should be designed to directly encourage businesses to hire more workers.

The Democratic proposal adheres to the basic principles of sound policy: it provides a boost to job creation and economic growth now when it is needed and does not create large future deficits or increases in debt that are a drag on growth. The Democratic plan just has "more taste" and is "less filling."

When the JEC Democratic staff compared the impact on jobs and growth of the President's $726 billion "Jobs and Growth Initiative" and a much smaller but more targeted Democratic alternative, they found that the Democratic proposal generated roughly twice the additional jobs and growth by the end of this year than the President's plan but at one-seventh the cost. The Republican proposal provides less growth and fewer jobs in the first year when they are really needed than the Democratic proposal.

Myth 2: The Republican tax proposals are good for economic growth. The reality is that the Republican tax proposals hurt economic growth and depress national income in the long run.

An analysis by the JEC Democratic staff found that because of its long-run budgetary costs, the President's plan had adverse long-run supply-side effects that lowered national income in 2013 by 0.4 to 0.6 percent. In their most recent analysis of the President's budget, the CBO found adverse macroeconomic effects if tax cuts are not paid for—that a proper "dynamic scoring" would raise, not lower, the costs of the administration's tax proposals.

Economic theories that claim that private saving should fully make up for drops in public saving are unsupported by experience. What did we learn from the Reagan era and the fiscal discipline of the 1990s? The Reagan tax cuts pulled down both public saving and national saving; the tax cuts failed to generate the large supply-side responses that had been claimed by the proponents of the cuts.

Myth 3: The Republican proposals are fair and are aimed at the middle class. In reality, the Republican proposals are unfair and are heavily tilted toward the very top of the income distribution.

The lion's share of the tax cuts enacted in 2001 already went to the very richest of households, particularly the tax cuts scheduled to take effect after 2002. Before the 2001 tax cut, the justification for large tax cuts for the wealthy was that we were simply "returning the people's money" and getting rid of surpluses that were too big, and the wealthy were the ones who paid the most in taxes. But that is clearly not the case because now we have no surpluses.

By 2010 when the tax cut is fully phased in, over a third of the tax cut goes to the richest 1 percent of households, while less than one-fourth goes to the entire bottom 60 percent. Despite this, the administration has proposed additional tax cuts that would clearly benefit only high-income households: the dividend tax exclusion and the new savings incentives. As part of their growth and jobs package, the administration also proposes to accelerate the portions of the 2001 Tax Act that highest-income households benefit the most, while leaving unchanged, continuing to phase in slowly, elements of the 2001 tax cut that most benefit lowest income families with children. The plan truly keeps the spirit of the administration's proposals—"leave no millionaire behind."

In advertising just how "fair" their growth package is, the administration has repeatedly relied on the average tax cut statistic, stating that households will "on average" receive a tax cut of over $1,000 in 2003. But this is far greater than what a typical household near the middle of the income distribution would receive; in fact, four-fifths of households would receive less than this amount. According to the Urban-Brookings Tax Policy Center, the middle 20 percent of households would get tax cuts averaging only $200 in 2003 from the President's plan. Meanwhile, households in the top 1 percent would enjoy an average tax cut of over $20,000, and millionaires would get tax cuts averaging about $90,000.

The compromise tax cut package crafted by Senator Grassley limits the dividend exemption to the first $500 of a family's dividends in fiscal year 2003, increasing by 10 percent of dividend income above $500 from 2004 to 2007, and 20 percent above $500 from 2008 to 2012. Still, even in the first year with the $500 limit, the great bulk of the dividend tax cuts will go to highest income households simply because they are most likely to have dividend income, and among those with dividend income are the most likely to have at least $500 of dividend income. In later years as the tax break for higher dividend income increases, the share of the dividend tax cut benefiting highest income households will increase. Overall, the Grassley plan would still provide a disproportionately large tax cut to the highest income households.

But most importantly, even though the low- and moderate-income families need the most help in this troubled economy, Republican proposals assist them the least.

Myth 4: The Republican tax plan is the best way to address the problems of long-term unemployment. The reality is that the Republican tax plan ignores the plight of the unemployed and the long-term unemployed.

Although the temporary Federal unemployment insurance program will expire at the end of May for workers exhausting regular state UI benefits, currently the Republican plan does not extend the program. Nor does the plan provide any further assistance to the approximately 1.1 million workers who have exhausted all of their unemployment benefits and still have not found work.

The unemployment rate today is 6.0 percent, higher than when the temporary Federal UI program was created in March, 2002, or extended in January, 2003. During the last 3 months, over 540,000 private-sector jobs have been lost and the economy has lost 2.7 million private-sector jobs since the recession began. On average, job losses in a recession bottom out after about 15 months and are erased within 2 years. The persistence of job losses at the 25-month mark in this recession is the most severe since the 1930s. These workers have carried the brunt of this recession, there are simply no jobs out there for them.

Myth 5: The Republican tax plan is fiscally responsible, but the reality is that the Republican plan leads to deficits as far as the eye can see and exacerbates the fiscal pressures posed by the imminent retirement of the baby boom generation.

What was a $5.6 trillion 10-year surplus when the President took office has virtually disappeared, even without counting any current proposals. The administration has repeatedly claimed that the deterioration was largely out of their control, but the fact is that even including the effects of the recession and other technical changes to the CBO budget forecast, the tax cuts already passed are responsible for over a third of the deterioration in the budget. Enactment of the President's new budget proposals would result in a $2.1 trillion 10-year deficit—a turnaround of an astounding $7.7 trillion.

A particularly large bias in administration estimates comes from assuming that expiring tax provisions will indeed expire and that the alternative minimum tax will continue to affect a larger and larger segment of the population without any fix.

Deficits reduce national saving, reduce the resources available for productive investments, and hence reduce future economic growth. Even Chairman Greenspan recently warned of the danger to our nation's long-term economic health: "I support the program to reduce double taxation on dividends and the necessary other actions in the federal budget to make it revenue-neutral .    .    . it should be done in the context of paygo rules, which means that the deficit must be maintained at minimal levels."

Myth 6: States will benefit from the Republican tax plan. The reality is that the Republican tax plan ignores the fiscal crisis of the States and probably makes it worse.

The Senate Republican plan established a $20 billion fund to be equally divided between State governments and local governments, to be used for education and job training, health care including Medicaid, infrastructure, law enforcement, and other essential services. However, at the same time, the Federal tax changes will reduce State revenues by approximately $10 billion, leaving States on net with no additional funds.

The recession that began in March 2001 has hit State budgets from both sides. Income and sales tax revenues have fallen with reduced economic activity, while the demands on social services have grown as joblessness has increased and family incomes have declined. Every week brings a new headline—or two—announcing another State's proposed cutbacks in services or program eligibility as it responds to a worsening budget crisis. Numerous spending cuts in social programs, including Medicaid, have been announced by States as they work to close their widening funding gaps. Some 22 States have proposed or adopted cuts in Medicaid and the SCHIP that would drop coverage for at least 1.7 million people if all the proposals were adopted. Prospects for 2004 are worse: the National Conference of State Legislators estimates that 41 States will face a cumulative budget shortfall of $78 billion.

The Democratic proposal requires that the Federal Government provide twice as much money to help States mitigate the negative impacts of the recession on poor and working families. This will also aid job creation.

Myth 7: The congressional Republican tax plans adhere to the limits set in the budget resolution. The reality is that the Republican tax plans are full of "smoke and mirrors" gimmicks that hide their true costs.

The true cost of the 2001 tax cut is much greater than the official cost because of the gimmicks of phase-ins and sunsets and because the tax cut allowed the alternative minimum tax to pick up additional revenue from more and more over time—a situation that is not likely to be tolerated for too long. The official cost ignores interest costs as well. As a result, a more realistic estimate of the cost of the 2001 tax cut is much greater than the official cost—nearly $2.5 trillion over the first 10 years, not the $1.35 trillion as officially scored. A fully phased in version of the tax cut would cost even more over 10 years, over $4 trillion, even before counting interest payments.

Myth 8: Republican tax and budget proposals are no threat to Social Security and Medicare. In reality the Republican tax and budget proposals break our promises on Social Security and Medicare.

Tax cuts now mean even bigger tax increases later. The Bush tax cut agenda gambles away the income security of future generations, and for what? Current tax cuts to the wealthy, which Republicans claim will ultimately benefit everyone. Instead, those tax cuts will ultimately cost everyone.

Our country's impending demographic challenge and corresponding fiscal pressures are a certainty. We were already faced with tough decisions ahead about how the retirement of the baby boomers would be made "affordable" to our Government budget: either taxes will have to rise in the future, spending cuts, or some combination of both. The Bush tax cut agenda is not responsible for that situation, but it surely and dramatically has made the tough problem even tougher. It makes the fiscal hole even deeper, and it unjustly pushes off most of the financial responsibility for the tax cuts and government programs we now enjoy, onto our children and grandchildren. We're putting our tax cuts on a credit card that our kids will have to pay off.

In the end, tax reform should be considered in a time of surpluses and not in a time during record budget deficits. Most importantly, we as a Congress have responsibility to act fairly and effectively to combat our Nation's economic crises. The Republican plans do not live up to that responsibility and I can only hope that my words today have separated the rhetorical myths from the facts.