Permanent Tax Cuts Are the Last Thing We Need

With deficits extending until who-knows-when, only the narrowest of interests will be served by carving the tax cuts into stone

By Robert Kuttner

The Republican House, seconded by President George W. Bush, voted in April to make permanent the entire $1.35 trillion tax cut of 2001. This proposal is highly unlikely to pass in the Senate, so last week the House passed a separate bill to force an early Senate vote solely on permanent estate-tax repeal. Either idea is astonishing, given the worsening budget imbalance.

When the tax cut was enacted a year ago, the economy was not yet in recession and September 11 had not yet happened. Surpluses were projected indefinitely. Since then, the non-Social Security budget has gone from $68 billion in the black in the first seven months of fiscal year 2001 to $185 billion in the red for the first seven months of FY 2002--a negative swing of $253 billion. Tax receipts are down $159 billion, while spending, mostly for anti-terrorism purposes, is up $95 billion.

Some of this fiscal deterioration reflects a weaker economy, but much of it was the deliberate fruit of tax policy. Over the full FY 2002, Bush's big tax cut will cost $71 billion in reduced revenues An additional $43 billion in revenue will be lost by the 2002 "stimulus" package, largely corporate tax cuts.

I'm not one of those who equates temporary deficits with fiscal sin. In a recession, we need deliberate deficits as countercyclical stimulus, whether through public spending or tax cuts. But this year's deterioration is not such a deficit. It's a structural hole in the revenue stream that will become enormous if the tax cuts are permanent.

Congressional Budget Office projections suggest that a permanent tax cut would create permanent deficits, excluding Social Security. In its latest long-term report, in March, the CBO forecast budget deficits in eight of the next nine years. Of the worsening fiscal picture over the decade, says the CBO, $2.4 trillion reflects changes in tax laws. By 2011, if the tax cut is extended, the annual non-Social Security deficit would be around $300 billion. This is just when large numbers of baby boomers retire and Medicare costs will skyrocket.

Given these figures, it is incredible that serious people, much less serious conservatives, want deeper tax-cutting. As recently as the 2000 Presidential election, both candidates played steward of the surplus. Al Gore proposed to put the general surplus into his famous lockbox to bolster Social Security's finances. Bush insisted the surplus was so robust that Washington could cut taxes and safeguard Social Security, too. Once in office, Bush abandoned that charade. Instead of subsidizing Social Security, the general budget will raid it. The budget erosion also obliterates the White House's claim that payroll tax receipts could be diverted into private retirement accounts without jeopardizing Social Security benefits.

Let's also recall that the key bipartisan compromise in last year's big tax cut was the provision requiring it to sunset after 10 years. But evidently, that's inoperative, too. The tax cut was deliberately "rear-loaded" to downplay its true cost between 2001 and 2006. The really big revenue losses occur in the final four years, long after Bush has come up for reelection.

The CBO, using fairly optimistic gross domestic product growth projections of about 3.2% annually, projects that extending the tax cut for a second 10 years would cost not the $1.35 trillion of its first decade but $4 trillion--an average of $400 billion a year. This would create a permanent structural deficit, like the one of the 1980s, only worse. Didn't we learn this lesson once?

To camouflage the real impact, conservative think tanks are now trotting out the old, discredited idea that tax cuts so stimulate growth that we should pad projections of future revenues. This cooking of the books is termed "dynamic scoring." Sorry, but that conceit died in the 1980s. Indeed, it was in the 1990s that growth took off after two widely deplored upper-bracket tax hikes.

Mercifully, dynamic scoring is failing to score with such honest fiscal conservatives as Dan L. Crippen, the Republican staff director of the CBO, or Lindy Paull, the Republican chief of staff of the Joint Tax Committee.

So why would any prudent Republican politician play this kind of roulette with the economy? For the same reasons Ronald Reagan did: First, a tax cut for the wealthy rewards political allies; second, it starves the public sector of revenue, making it impossible to finance new spending programs in keeping with the GOP's small-government crusade. For instance, repeal of the estate tax alone will cost $80 billion a year between 2011 and 2021--enough to finance good universal child care or a better prescription drug program.

No one--and certainly no fiscal conservative worthy of the label--should be playing these political and fiscal games. Both the budgetary and economic stakes are far too high for ideology to trump sound policy.

Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.

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