The Taxonomist

Tax-Cut Fever

Alan Greenspan has blessed a tax cut, the budget surpluses are said
to be bigger than ever, and Republicans control all branches of the
federal government. Are we ready to rumble with George W. Bush's
gigantic tax cuts? Can we cut taxes even more?

Take a deep breath.

The projected surpluses. According to the Congressional Budget
Office (CBO), non-Social Security surpluses over the upcoming decade
could be $3.1 trillion, assuming ... well, that's the rub. To reach that
staggering surplus estimate, the budget office assumed such things as
zero population growth, government wages falling further behind private
wages, more and more Americans cheerfully paying the Alternative Minimum
Tax, and so forth. It's not the technicians' fault: These implausible
assumptions are all required by law. But nobody, including the
estimators, thinks that they're realistic.

Here's a more believable story. Start by subtracting the $400 billion
in projected Medicare surpluses, which an overwhelming majority in
Congress last year said should be off the table. That leaves us with
$2.7 trillion. Then adjust projections of future appropriations so they
keep up with population and wages. That trillion-dollar adjustment
knocks us down to $1.7 trillion. Next, fix the minimum-tax problem,
concede that some technically-expiring-but-always-extended tax credits
will be continued, and assume that Congress keeps providing aid to
farmers. We're now at a surplus of $1.3 trillion--and we haven't yet
gotten to the hundreds of billions of dollars in new spending on
education, prescription drugs, defense, and other programs that enjoy
widespread support.

Add these up and over the next decade we may not have a trillion
dollars in surpluses, even if all goes well. And over the next four
years, we shouldn't expect more than a few hundred billion dollars.

The Greenspan theory. Until recently, Alan Greenspan's main theme
was how good it was to pay down the national debt. But with a Republican
president, Greenspan is suddenly concerned that surpluses will be too
big and--horrors!--might either lead to more public services or force
the government to start earning interest rather than paying it. A
debt-free federal government is something that no one has any experience
with, and it does raise some intriguing issues. But it's not a "problem"
we need to worry about over the next few years; trust me--we'll still
have a national debt at the end of Dubya's first term. And a debt-free
America isn't a long-term concern either. Ten or 15 years from now, the
retirement of the baby boomers will send the red ink flowing once
again--and any financial resources the government may build up in the
meantime will come in very handy. These are the kinds of things
Greenspan used to harp on, and his change of heart looks a lot more
political than substantive.

The Bush tax cuts. Since the start of the year, the proposed Bush
tax cuts have been growing like Topsy. First, Bush spokesman Ari
Fleischer allowed that there are actually 10 years in a decade, thereby
adding about $300 billion to the $1.3-billion "10-year" price tag that
the Bush campaign had promoted, though it was based on nine-year
estimates. Then, new Treasury Secretary Paul O'Neill opined that it
would probably be necessary to fix the huge new Alternative Minimum Tax
problem that Bush's plan would create, adding another $250 billion to
the tax cut's price tag. Others noted the obvious, that cutting taxes
will mean higher government interest payments, which brings the cost of
Bush's plan up to $2.2 trillion. CBO's latest forecast of revenues under
current law boosts the tax cut's real price to about $2.5 trillion. The
Bush administration has suggested speeding up the phase-ins of the tax
cuts, which could add hundreds of billions of dollars to the 10-year
cost. And business lobbyists are clamoring for new corporate tax breaks
that could add several hundred billion dollars more.

The bottom line. With less than a trillion dollars in plausibly
available surpluses over the next decade--maybe a lot less--how we can
afford a tax cut that will cost as much as three times that amount? It
seems as though we'd be bankrupting the government in order to cut taxes
that mostly affect the very-best-off people in the country. Yipes! I
think that's exactly the plan!

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