By Laura D'Andrea Tyson
When George W. Bush became President, the federal government enjoyed a projected 10-year budget surplus of $5.6 trillion. Today, less than three years later, Washington confronts sizable annual budget deficits regardless of the cyclical ups and downs of the economy. A growing number of private forecasters now predict a 10-year deficit of around $4 trillion -- $6.7 trillion excluding the Social Security surplus. Government debt and interest payments are slated to double as a share of the economy over the next decade, crowding out private investment and government spending on anything else.
President Bush claims that the economic slowdown and the war on terrorism have triggered the nation's fiscal woes. But they are only part of the story. According to the Congressional Budget Office, over the next two years, the Bush tax cuts enacted since 2001 will cost nearly three times as much as the fighting and occupation in Afghanistan and Iraq, reconstruction and relief after September 11, and homeland security combined. What's more, these tax cuts are scheduled to explode, totaling $2 trillion over the decade. And that's assuming the sunset provisions phasing them out are enacted. If, as seems likely, they are not, the 10-year budgetary costs of the tax cuts will rise by another $2 trillion.
The Administration argues that its tax cuts are necessary to stimulate growth in a sluggish economy. But this argument is specious. The economy may have needed a temporary infusion of additional demand during the past three years. But temporary tax cuts or spending hikes for hard-pressed working families, unemployed workers, and state governments would have stimulated demand much more effectively than tax cuts for the rich. The Administration has also made misleading comments about the size of the tax benefits people will receive from the 2003 tax package. Although the average tax cut is about $1,000, that's because the tax breaks for the richest Americans are so large. More than half of all American taxpayers will get a reduction of less than $120 per year over the next two years. More than a third of taxpayers will get nothing.
And those long-term "supply-side" growth benefits? Even the Republican-controlled Joint Committee on Taxation, using a variety of dynamic scoring assumptions, was forced to admit that these cuts are likely to reduce the economy's long-term growth. Why? Any positive business-investment incentives from lower taxes will be outweighed by the curtailing of national saving and investment caused by mammoth budget deficits. To the extent that larger deficits diminish domestic saving, they eat into productive investment. To the extent that larger deficits are funded by borrowing from the rest of the world, they raise the nation's foreign debt and drive future income into servicing this debt. Contrary to the claims of Administration ideologues, larger deficits mean lower future living standards.
Some Republicans genuinely desire tax cuts and bigger deficits to force lower government spending. Certainly, the federal government confronts a shrinking revenue stream. In 2003, total federal revenues as a share of the economy will fall to their lowest level since the end of the Eisenhower Administration. Federal income tax revenues as a share of the economy will fall to levels not experienced since 1943, when programs such as Medicaid and Medicare didn't even exist. One out of every three dollars the federal government now spends outside the self-funded Social Security system must currently be financed by borrowing. This is the largest share of deficit-financed spending in the last 50 years. If the deficit hits $400 billion by 2008, as many analysts predict, and if Social Security, Medicare, defense, and interest payments on the debt are spared the budgetary axe, government spending on everything else -- from education to homeland security -- would have to be slashed by more than 80% to restore budgetary balance. Unless some of the tax cuts are rescinded, the nation will encounter a grim choice between large deficits and lower living standards on the one hand or deep cuts in Medicare and Social Security -- just as baby boomers begin to retire.
Over the past three years, the Administration has served its ideological and wealthy campaign supporters well. Payroll taxes that pose the heaviest tax burden for most American families have been left untouched while the top marginal income tax rate, the capital-gains tax, and the dividend tax have been reduced. At the same time, the government has been starved of revenue to honor its entitlement commitments to the middle class and its means-tested commitments to the poor and disadvantaged. Even as they attack the Democrats for inciting class warfare, the President and his congressional allies have been waging it with a vengeance. Many Americans, especially those with low incomes, do not vote. As Americans consider whether to vote in 2004, they should ask: Are they better off now? Will they be better off in the long run? For most Americans, the answer is no.
Laura D'Andrea Tyson is dean of London Business School.