/

The right thing is not permanent tax cuts

by Isabel Sawhill

WASHINGTON — Since his re-election, President George W. Bush has emphasized the need for U.S. fiscal responsibility. He has pledged to halve the enormous federal budget deficit in his second term. He has vowed to put social security on a sound, long-term footing. And he has just submitted a 2006 budget request that promises to make the federal government leaner and more effective.

The president’s conversion to fiscal conservatism is welcome. But unfortunately, he has diverted the country’s attention from the primary reason for these deficits — his own tax cuts, which he now wishes to make permanent. Doing so would add some $400 billion to the annual deficit a decade from now. And since they would decrease net national savings at a time when such savings are already far too low, there is no serious economic argument that they can increase GDP enough to allow us to grow our way out of the deficit.

To be sure, current deficits are not all Bush’s fault. The end of the 1990s’ Internet bubble, the 9/11 attacks and the normal cycle of economic expansions and recessions conspired against him in his first term. But all of the above factors explain some one-third of the deterioration in the country’s fiscal position since 2000. Most of the rest of the problem was caused by legislated revenue reductions — tax cuts — that greatly exceeded any corresponding cutbacks in government programs. They now total about $250 billion a year in value, relative to what Clinton-era law would have generated.

Bush is now trying to make up for lost time by placing some firm constraints on government spending. He is taking on a difficult task, asking the Congress and the country to curb or eliminate programs that many hold dear. This is a welcome development. Despite Bush’s reputation for candor and for making tough decisions, he did not live up to these standards in his first term on the budget front. He wrongly told the nation’s citizens that they could have tax cuts and fiscal responsibility; he used the rhetoric of small government without backing that language up in his budget plans.

But there are still three big problems with Bush’s current approach. Together they mean that, even if he succeeds in his goal of halving today’s deficit by 2009, it will almost surely mount back to current levels in the early years of the next decade.

First, the part of the federal budget that the president is targeting most explicitly for reductions — domestic discretionary accounts — make up less than one fifth of the total. National security and homeland security activities would be spared the budget knife. So would most elements of Medicare, which will soon be the government’s largest program. These exemptions are all understandable, but they mean that a huge deficit dragon must be slayed by attacking only one small part of the beast.

Second, even these domestic discretionary accounts would not be cut that severely. Again, this is reasonable policy. Popular opinion notwithstanding, they are not made up primarily of pork barrel projects. Fodder for late-night comics, such as honeybee farm price supports and gilded bridges in the home districts of appropriations committee chairmen and studies on the mating habits of sea slugs in outer space, make up less than 5 percent of the total by any definition. To cut the domestic discretionary budget, one must go where the money is, and reduce funds for most or all of the following: highways, other transportation infrastructure, farmers, science research, environmental protection and education. Some such programs merit pruning, to be sure — but others merit increases if we are to invest in our future workforce and national infrastructure.

A recent Brookings study identified in some detail which merited pruning and which deserved increases. In the process, we identified some $20 billion in net annual spending cuts. But even if these cuts were enacted entirely, and other programs held to the rate of inflation plus population growth for the foreseeable future, the projected federal deficit would be reduced by less than 5 percent.

Third, whatever the merits of Bush’s social security reform proposal, its overall fiscal effects will probably be little better than neutral in a best case. Some budget hawks might accept his plan, whether they like it or not, if it led to reductions in the growth rate for guaranteed benefits. But it will also add as much as $4.5 trillion in additional debt over the next several decades, to bridge the period from the current system to the new one. Any net fiscal benefits from the president’s proposal — and it is too soon to say if there will be any at all, since an actual plan has not yet been unveiled — will therefore be modest and will be realized only well into the future.

Fourth, as if another argument was even needed, we have never before cut taxes in a time of war. Indeed, there is something immoral about asking only those in harm’s way to sacrifice while so many of us, who need it least, are being rewarded with lower taxes. After World War II, the nation’s veterans were afforded an opportunity to go to college, courtesy of the GI bill. During the Vietnam War, President Lyndon Johnson proposed, and Congress enacted, a 10 percent surtax on all individual and corporate income. Something similar to that surtax, and a wartime moratorium on any further tax cuts, is needed for as long as it takes to produce a secure environment in Iraq and Afghanistan.

The bottom line is this. A country that wants the best in health care, education, scientific research, transportation and communication, while also showing compassion to its poor and infirm, cannot do so on the cheap. This is even more true in time of war. Nor should it finance these needs through continued borrowing. Not only is this unsustainable but last year all of the difference between spending and revenues was financed by other countries, making us highly dependent on the continued confidence of foreign investors.

A president who prides himself on having the strength of his convictions, and the resolve to do the right thing, cannot and should not in good conscience propose extending the tax cuts, especially during a time of war. Now that the economy is performing well, we can and should forgo further tax relief. It is just that simple.