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Winners, Losers, and the Tax Cut
Subject Deficit Spending
Topic Taxes, Spending, and Deficits
Key Words Taxes, Government Spending, and Deficit Spending
News Story

Three major areas of government spending are income security, national defense, and interest on the public debt. Spending on national defense has grown rapidly because of recent war efforts, the third area of spending; these major expenditures will mean that interest on the public debt is likely to grow as well. When government spending exceeds tax revenues, the government must borrow to make up the difference and the national debt grows. According to the Congressional Budget Office, federal borrowing to finance the Bush tax cut, the war on terror plus routine government spending will total $3.60 for every dollar borrowed over the next six years.

The Bush tax cut is estimated to put about a trillion dollars in the pockets of American consumers over this same six year period. From 2001 to 2006, the tax cut will average $3,593 per person, but the per capita share of the national debt will increase by $13,000 from 2002 to 2007.

The Congressional Budget Office also reports that $480 billion, about one-fourth of the current budget deficit, will be borrowed to finance the tax cuts. The money borrowed by the government can be repaid by increasing future taxes, by reducing government spending, or by deferring payment to the future through additional borrowing.

Conclusions differ on the tax cut, depending on which researcher you listen to. "The government is basically borrowing $1,000 in your name and then handing you $250 of it," according to Robert McIntyre, director of Citizens for Tax Justice, a Washington based research firm. "The net effect is to leave you deeper and deeper in debt."

On the other hand, Daniel J. Mitchell, a tax expert with the more conservative Heritage Foundation, said, "if you go into debt to win World War II, it is a good thing; if you are going into debt to finance a trip to Las Vegas to blow your pension fund, that is a bad purpose. The current borrowing is good because we will get long-term investment." A tax model developed by the Heritage Foundation predicts that for each dollar of tax cuts from 2003 to 2013, disposable income will rise by $4.14. This model is based on the assumption that the money borrowed to finance tax cuts stimulates investment and creates jobs.

Regardless of the final outcome of the tax cuts themselves, the money being borrowed to finance the cuts must be paid back. As the "war on terror" continues and the need for social spending grows, it is unlikely that government will be spending less, and that could mean a higher tax bill for Americans in the future.

(Updated October, 2003)

Questions
1.

Define Deficit Spending.

2. Explain the difference between the national debt and a budgetary deficit.
3. Discuss the resulting trade-off between current and future consumption implied by the article
Source David Cay Johnston, "Studies Say Tax Cuts Now Will Bring Bigger Bill Later," The New York Times Online, September 23, 2003.

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