We have diehard liberals preaching the virtues of reducing the federal debt, not because they believe in smaller government but because this makes them seem frugal, cautious and even conservative. Meanwhile, President Bush flaunts his proposed spending increases for education and Medicare, not because he believes in bigger government but because they make him seem humane, sensitive and even liberal. The liberals want to seem conservative, and the conservatives want to seem liberal. Both are fleeing their traditional stereotypes: liberals as extravagant spenders, conservatives as cruel cheapskates.
The result is calculated confusion. The antagonists informally de-emphasize their central dispute–the size of government–and shift the debate to side issues that (they hope) will disarm their opponents. For example:
This is Bush’s ace. Consumer confidence has dropped for five straight months; in January existing-home sales fell 6.6 percent. The more the economy weakens, the harder it is for Democrats to resist tax cuts. There’s a certain common-sense appeal to bolstering people’s purchasing power by reducing their taxes. A year ago President Clinton proposed only $350 billion in tax cuts over a decade. Now many Democrats talk in the $700 billion to $1 trillion range–much closer to Bush’s $1.6 trillion between 2002 and 2011.
No, say critics. His budget skimps on paying down the federal debt–all the Treasury bonds and bills issued to cover past budget deficits. Worse, the tax cut might create future deficits when combined with programs not in the present budget: an antimissile defense and private accounts for Social Security, for instance. All this is possible, especially if the surplus forecasts turn out (as they might) to be too optimistic. Still, the critics’ case is wildly overstated.
Between 2002 and 2011, Bush projects budget surpluses of $5.6 trillion. This is defensible; the Congressional Budget Office made a similar estimate. The tax cut would reduce the surplus by $1.6 trillion and require an extra $400 billion in interest payments. This leaves a surplus of $3.6 trillion. Of that, Bush would use $2 trillion for debt reduction. (From 2001 to 2011, the debt would drop from $3.2 trillion to $1.2 trillion. Interest payments would decline to below 3 percent of federal spending, down from 15 percent in 1997.)
Now we’re at $1.6 trillion in surplus. Bush proposes almost $200 billion in new spending–mainly for changes in Medicare, including a drug benefit. Bush labels the remaining $1.4 trillion in surplus a “reserve” against faulty estimates, further debt reduction or more spending. All the possible claims on the reserve (the missile defense, private accounts) could exhaust it. But if you’re trying to make Congress set spending priorities–as Bush is–his approach isn’t unreasonable.
Politically, this is Bush’s Achilles’ heel. He says that taxes belong to the people who earned them–not the government. OK. The political problem is that most federal taxes are paid by a small constituency of the well-to-do and wealthy. In 2001 the richest 10 percent of Americans–those with incomes above $107,000–will pay 68 percent of the income tax and 52 percent of all federal taxes, estimates the Congressional Joint Committee on Taxation. With its across-the-board rate cuts, Bush’s plan gives them the largest cuts. Citizens for Tax Justice, a liberal advocacy group, estimates that the richest 1 percent get 31 percent of the income-tax cuts (slightly below their share of income taxes, 36 percent). Democrats are aghast; they want smaller tax cuts to concentrate benefits on households under $100,000.
To handicap the tax debate, watch these issues. If the economy weakens further, pressure for tax relief will intensify. But so will pressure to redirect the benefits down the income ladder. My view–stated in an earlier column–is that the economy needs a tax cut. I would accelerate Bush’s across-the-board rate cuts and doubling of the child credit (from $500 to $1,000). But I would cut today’s top rate of 39.6 percent only to 35 percent, not 33 percent, as Bush proposes. All this would maximize the tax cut’s immediate effect on the economy.
Like Bush’s critics, I think the long-term budget projections are too uncertain to enact his full tax package now; so I would defer action on his other proposals (abolishing the estate tax, marriage-penalty relief, new charitable deductions). But unlike his critics, I think Bush is correct on the central issue of government’s size. The real choice now is not between cutting taxes and paying down the debt. If immense surpluses emerge, Congress–Democrats and Republicans–will spend them. Even last year’s modest surplus spurred Congress to a spending spree.
It’s the wrong time for huge spending increases. The retirement of the baby-boom generation, beginning in a decade, will expand government commitments. Retirement benefits will inevitably increase, exerting pressure for higher taxes. If we raise spending now, we will begin this process from a higher base of spending and taxes–taxes that will ultimately have to be paid by today’s children and young adults. This would be a dubious legacy.
