10-25-05,7:48am

Just as Hurricane Katrina brought new attention to the problem of poverty in the United States, the ongoing debate over how to pay for hurricane-related relief and reconstruction has brought new attention to the nation’s fiscal problems.

But it’s the policy course set by the Bush administration well before Katrina struck—not the cost of rebuilding after the recent series of hurricanes—that will lead our nation to ruinously high budget deficits in the long term.

The large tax cut bills Congress passed in 2001 and 2003 have done much to drive down federal revenues to historically low levels when measured as a share of the economy. Extending the tax cuts—one of the immediate legislative goals of the Bush administration and Republican leaders in Congress­­­­—will mean low revenue for decades. (Under current law, the tax cuts are scheduled to expire by 2010 but Congress likely will act this session to extend the cuts.)

In contrast, federal spending, while not particularly high now, is projected to rise dramatically in coming decades to help pay for baby boomers’ retirement and health care.

If we ignore this long-term mismatch between high expenditures and low revenues, deficits will explode, rising to levels that could seriously damage the economy. A logical first step would be to reconsider the parts of the 2001 and 2003 tax cut bills that have given enormous tax windfalls to extremely high-income households. Here’s why.

1. Wealthy households receiving tax cuts are the least in need of government help. Not only do they earn more than other Americans, their incomes are growing faster.

Earlier this year, the Congressional Budget Office released data showing that between 1979 and 2002, the average after-tax income for people in the top 1 percent of the population more than doubled, rising by 111 percent after adjusting for inflation. In contrast, average after-tax incomes rose by 15 percent for those in the middle fifth of the income spectrum, and by just 5 percent for the lowest-income fifth of the population.

As a result, over the past decade, higher-income people have enjoyed a larger share of the nation’s total income than at any time since the Depression.

2. High-income tax cuts are expensive. People making at least $1 million a year will enjoy an average $103,000 tax break this year from the 2001 and 2003 tax cut bills. That’s nearly 140 times as large as the $742 tax cut the average middle-income household will receive. Plus, the tax breaks for the wealthiest will continue to grow as more tax cuts enacted in 2001 for high-income households phase in over the coming years.

If you add up all the tax benefits that households in the top one percent of the population—a group making at least $380,000 this year—will receive each year from the 2001 and 2003 tax cut bills when they are fully in effect, this amount is as much as the federal government spends annually on education. It’s also nine times the total that the federal government spends on environmental protection each year.

3. Tax cuts for high-income households are being “paid for” with borrowed money—as are all of the recent tax cuts. Future generations will be forced to pay for them through higher taxes and/or reduced government services. It’s unfair to burden our children and grandchildren with these debts. It’s doubly unfair to expect future generations of middle- and lower-income Americans to pay for large tax cuts enjoyed by today’s affluent Americans.

Moving the federal budget onto a sound long-term footing will require difficult choices all around. Recouping revenues from tax cuts for high-income households would be an appropriate first step in this process, as all Americans would expect the most well-off in the country to share in the sacrifices that will be needed. Otherwise we risk making the gap between wealth and poverty in the United States—a gap that Katrina exposed so disturbingly—even wider.

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Joel Friedman is a senior fellow and John Springer is a senior writer at the Center on Budget and Policy Priorities. The CBPP is one of the nation’s premier policy organizations working on fiscal policy and public programs that affect low- and moderate-income families and individuals at the federal and state levels.