POLICY BRIEF FROM AMERICANS FOR TAX REFORM

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Just Say No to a Trigger Mechanism

By: Daniel Clifton

As the House of Representatives is set to vote to make President Bush's tax cuts permanent, it appears that opponents of this bill will attempt to "poison pill" the legislation with an amendment that will only allow future tax cuts if projected surpluses actually materialize. This idea is termed a "trigger" mechanism, and it an idea that sounds a lot better than it really is. In fact, the trigger mechanism eliminates taxpayer predictability of future tax burdens, makes no consideration of Congress' insatiable appetite for increased spending, and will actually raise taxes if the economy enters an economic slowdown. The ultimate effect is that the trigger would take away any benefit that would be derived from cutting taxes. Therefore, it is imperative that House members stay away from any amendment that attempts to derail the effect of ensuring permanent tax relief.

As a starting point, for tax cuts to increase taxpayer incentives to work, save and invest, taxpayers must have a level of predictability to ensure their investments can be paid for. As the marginal income tax rate cuts are phased-in, workers have greater take home pay in their weekly paychecks. The tax cut is essentially similar to receiving a raise, by increasing the taxpayer's weekly budget. The taxpayer then assigns additional money to new spending, saving, capital investment, and/or debt reduction. However, knowing that each year their tax burden will change, the taxpayer will be less confident to make the investments needed to improve the long-run performance of their personal finances, their businesses, and the economy as a whole.

Second, a trigger could have pro-cyclical effects when revenue projections decline as the economy weakens, the exact time when tax cuts are needed most. If a trigger mechanism were in place for the previous tax cuts, the initial tax cuts would have been frozen as the economy was entering a recession. This would have prevented an additional $69 billion of tax relief in 2002, which is currently being used to bolster consumer spending, and in effect, is helping businesses work off excessive inventories and leading to new employment growth.

According to the Council on Economic Advisors, President Bush's tax relief has helped the private sector create 800,000 more jobs than there otherwise would have been by the end of 2002. Tax relief has raised the prospects of a solid recovery in 2002 by boosting economic growth by 0.5 percentage point. Alan Greenspan and just about every major economic consulting firm in the country have confirmed President Bush's tax cut served as an effective stimulus that lessened the impact of the recession.

Additionally, from 1991 to 2001, household liabilities more than doubled, from $3.9 trillion to $7.9 trillion. The additional tax relief that would have been stalled by a trigger is helping consumers pay off this enormous household debt, which is setting the stage for continuous and more aggressive consumer spending in the future. If consumers continue to have high household debt burdens, future spending will be severely restrained and thus will slow the economic expansion. Accordingly, if a trigger were inserted in the original Bush tax cut, the economy might still be in a recession, instead of the economic recovery that we are now experiencing.

Furthermore, tax cuts did not cause the current budget deficits. According to the non-partisan Congressional Budget Office (CBO), the recession and war caused the surplus to decline: CBO Director Dan Crippen said "over 70% of (FY2002 surplus reduction) results from the weak economy and related technical factors." CBO said bipartisan tax relief resulted in less than 12% of the surplus decline in FY 2002.

Additionally, a trigger policy makes no consideration of Congressional spending. The assumption by opponents of tax cuts is that less revenue leads to budget deficits but new spending on government programs (that continually grow faster than actual revenue) has no impact on budget deficits. There is absolutely no reason that spending should be treated differently than tax cuts.

Finally, the criteria by which trigger mechanisms will kick-in is based on educated guesses by revenue forecasters. We have witnessed budget forecasts missing their predictions year after year as the forecasts often exaggerated rosy budget projections when times were good and exaggerated doomsday projections when times were bad. Do you remember, "deficits as far as the eyes can see?" Within several years, after making tough decisions by restraining government spending, the federal government had surpluses. Clearly, the trigger gives too much consideration to budget forecasts that fluctuate year to year.

Discussions about triggers takes away from the real discussion about making the Bush tax cut permanent. If Congress does not repeal the sunset provision from last year's tax relief plan, taxes will increase by more than $550 billion over a two-year period, and as a percentage of the economy will be larger than the Clinton tax increases. This money will come from hard working families and productive businesses.

On an individual level, the average family will lose $1,100 of disposable income in 2011 just to pay the government. Taxes will increase by 50 percent for lower-income families, the child credit will fall by 50%, the marriage penalty will be reinstated, education savings will be taxed, retirement savings will shrink, and government will continue to tax people even when they die. Furthermore, without repealing the sunset, economic growth, job creation, and savings will be hindered significantly.

It is imperative that Members of the House vote yes on the Tax Relief Guarantee Act without any "poison pill" amendments such as the trigger mechanism.