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America’s Families Feel the Brunt of Irresponsible Tax Cuts

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When all you have is a hammer, every problem looks like a nail. Once again to combat the lackluster labor market, the administration has proposed guess what – tax cuts. Strong growth at the end of 2003 gave hope that more jobs, higher wages and better benefits are just around the corner. That did not happen, employment growth in December and January was disappointing, to say the least. The irony of the administration’s insistence that more tax cuts will do the trick is that the past tax cuts are partially to blame for the weak labor market recovery. Moreover, the long-term deficits created by the tax cuts put the already weak recovery in jeopardy. And finally, to add insult to injury, the president’s 2005 budget inadequately funds or even cuts may of the programs that families, who were hurt by the lackluster labor market, have to rely on. Instead of a being the promised solution, past and proposed future tax cuts are hurting America’s families in the middle of the "job loss" recovery.

The first "job loss" recovery since World War II is taking a toll on American families. The economy has a nearly 9 million job deficit from where it should be at this point in a recovery. The lack of employment growth has had a measurable impact on wage growth, which has been flat. To top it all off, prices for important consumer items, especially education, housing and health care, are outpacing prices for other items. Since the start of the recession in March 2001, consumer prices rose by 5.1 percent. In comparison, medical care grew by 12.5 percent and education increased by 19.2 percent during the same period. These price increases are occurring at a time when employers are reducing their benefits. And to pay for these costs, households have borrowed record amounts of debt.

What was needed in 2001 was an effective temporary fiscal stimulus. The administration opted for tax cuts for the wealthy instead. The tax cuts were inefficient in creating more and better jobs because they were back loaded and top heavy. The largest effects of the tax cuts were scheduled to occur in later years, when the economy was hopefully recovered and no longer needed a stimulus. Also, much of the tax cuts were biased towards high income earners. High income families are less likely than low income families to spend the additional money. It would have been more effective to have temporary targeted tax cuts for the middle and working classes or targeted spending increases to jump start the economy. This could have boosted growth and job creation.

Not only were the tax cuts inefficient in avoiding or at least moderating the job loss recovery, they also blew a large hole in our fiscal deficit. The costs of the tax cuts are staggering. In the outer years the tax cuts alone are expected to cost more than $600 billion per year, including interest. Our deficit is projected to grow to approximately $5 trillion in 10 years. (Don’t look for this figure in the president’s budget, though. The budget conveniently leaves out the costs of making the tax cuts permanent.) Large deficits can have serious repercussions for long-term growth and stability. The perception of a fiscally unsustainable future can decrease confidence in economic management and increase the perceived risk of investing in the United States. The costs of borrowing in the United States could rise, ultimately reducing growth and living standards. Hence, the large tax cuts cast a dark shadow of doubt on the promise of a stronger, sustained labor market recovery.

The administration will have us believe that cutting back on many domestic programs will address the fiscal crisis. This is a blatant attempt at diverting attention from the real problems with serious consequences for working families. The non-security spending of the budget has remained stagnant, which makes it an unlikely contributor to skyrocketing deficits. Never mind the evidence to the contrary, the president’s 2005 budget identifies non-security spending as the prime target for cuts. Many of the programs that could help to ease the burden of the "job loss" recovery for working families are being cut. This includes support for workforce training, education, child care, and health care- all of which are necessary tools for people to re-enter the labor market when the jobs become available. Additionally, as the weak labor market has adversely impacted families’ income, they are more in need of public assistance for big-ticket items, such as housing and childcare. Housing assistance has been cut, despite home prices outpacing wage and other prices, as has been childcare assistance. And instead of offering real help, the administration pushes proposals for health and pension benefits that will likely benefit the healthy and wealthy the most.

Working families have lived through the worst labor market recovery in any recovery since WWII. Rather than focusing on tax cuts for the rich and cutting programs for working families, the administration would be better off easing the burden of working families by creating good job opportunities, providing public support for middle class families, and making a serious attempt to rein in the deficit by taking back the tax cuts for the rich.

For more information about the "job loss" recovery and the middle class squeeze, visit our Data Digest. If you want to know more about how the budget effects working families, click here.

Sonal Shah is the associate director for International and Economic Policy and Christian Weller is a senior economist at the Center for American Progress.

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