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Pew Report: Permanent Extensions of Tax Cuts Would Sharply Increase National Debt
The Pew Charitable Trusts

June, 2010

Extending the 2001 and 2003 federal income tax cuts would sharply increase the national debt, even if extensions are limited to individuals earning below $200,000, as proposed in the administration’s budget, according to a new report by the Pew Economic Policy Group. Decision Time: The Fiscal Effects of Extending the 2001 and 2003 Tax Cuts examines the impact of several different extension options.

“In light of the escalating national debt, policy makers need to understand the long-term costs of any extension of the tax cuts,” said Ingrid Schroeder, director of the Pew Fiscal Analysis Initiative, which produced the report. “Our report shows that there are no easy answers, but there are facts.”

The current debt-to-gross domestic product (GDP) ratio in the United States is 57 percent, compared to an average of 37 percent over the last 50 years. Making the tax cuts permanent for all taxpayers would cost $3.1 trillion, including interest on the national debt, over ten years and cause the national debt-to-GDP ratio to rise to 82 percent.

If the cuts are only extended to individuals earning less than $200,000 and married couples less than $250,000, the ten-year cost of the cuts would be $2.3 trillion (including debt interest) and the debt-to-GDP ratio would increase to 78 percent. Both of these ratios would be the highest since 1950, when the United States was still paying off debts incurred during World War II.

Extending the tax cuts for just two years to all taxpayers would cost $558 billion (including debt interest) and would increase the debt to 70 percent of GDP by 2020. This figure is only 2 percent more than if the cuts were allowed to expire at the end of 2010.

“Congress will have to weigh many issues as it considers what to do with the expiring tax cuts. This analysis shows the implications that various decisions would have on the national debt, which is an important consideration in today’s economic climate,” said John E. Morton, managing director of Pew Economic Policy Group.

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