The Wall Street Journal's Jesse Drucker explains today using an analysis from Citizens for Tax Justice that the cost of the business tax cuts in the stimulus package passed by Congress last week is over $22 billion over ten years, roughly three times the official estimate of $7.5 billion over ten years.

The official "score," or cost estimate, from the Congressional Joint Committee on Taxation for the entire stimulus package is $124.5 billion over ten years. The cost in 2008 alone is higher -- $151.7 billion -- but part of that cost is recouped later.

That's because the business tax breaks cost $44.8 billion in 2008 but their ten-year cost is officially estimated to be only $7.5 billion, since they consist of moving forward existing deductions for investments (accelerated depreciation and expensing, or immediate depreciation, for certain small business investments). In a technical sense, firms are not getting any new deductions but are just able to take certain deductions earlier.

But Drucker explains, these estimates fail to account for what economists call the "time value of money." Basically, money in your hand today is worth a lot more than the same nominal amount of money in your hand ten years from now, because inflation erodes the value of money over time and because money can be invested at a profit over several years. Of course, business people are perfectly aware of this, which is why they lobbied for this form of tax break in the first place.

The additional cost of the business tax cuts in the stimulus bill can be explained another way: Since the tax cuts are all deficit-financed, they always add to the national debt, resulting in larger interest payments by the federal government (i.e. by the taxpayers). If a deduction is taken now rather than a few years from now, that means we have additional interest we're paying on the national debt over those few years. The table below shows the calculations CTJ made to identify the added interest costs of the business tax breaks in the stimulus bill.

bustaxbreakscost.gifYou might ask why the Joint Committee on Taxation doesn't take this extra cost into account. The reason is that the staff of the Joint Committee doesn't take into account any added interest payments that result from tax cuts. All of the provisions of the stimulus bill actually increase interest payments on the national debt since the entire bill is deficit-financed.

Conservative analysts like to ignore the effect of additional interest payments that result from tax cuts, because they generally want the costs of tax cuts to appear smaller. This might be more easily ignored in other situations, but in the case of the business tax breaks that are part of the stimulus package, the additional interest actually triples the costs.

This situation shows that leaving the added interest out of cost estimates for tax breaks can lead to misleading conclusions. Really we should consider the added interest that results from any tax cut proposal as we contemplate its costs. When estimating the costs of a tax cut, Citizens for Tax Justice generally calculates the additional interest payments that result from increasing the national debt and shows how this increases the overall cost of the tax cut. For example, we have calculated that if the Bush tax cuts are made permanent and the costs are not offset (which generally seems to be Republican policy) then the total costs would be just over $5 trillion over the 2011-2020 period, with $954 billion of that in the form of additional interest that results.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog,

Sign Up for Email Digest

CTJ Social Media

ITEP Social Media