Mr. Bush's Fiscal Gaffe
The New York Times


July 7, 2001

No sooner had George W. Bush become president than he began warning of an impending recession and campaigning for a huge tax cut. But he forgot or perhaps did not know that a slowing economy, with lower corporate profits and personal earnings, would automatically result in lower tax collections and throw his knife-edged fiscal plan into imbalance. So instead of residing peacefully in "lockboxes" for the next decade, the trust funds collected to cover baby boomers' Social Security and Medicare benefits may be tapped as early as this year. Mr. Bush gave up long-term fiscal discipline for short-term political gain, and the salad days of surpluses have transmogrified into the bad old days of budget bickering.

It all began in January. With a decade of budget surpluses ahead, Mr. Bush swore he could deliver a trillion-dollar tax cut while erasing the national debt and leaving the trust funds for Social Security and Medicare untouched for 10 years. But after Congress set its spending levels and passed Mr. Bush's tax cut, less than $10 billion worth of leeway was left in this year's budget before the government would have to pry open the lockboxes. Now, thanks to shrinking income tax revenues, that narrow margin of error is about to disappear.

In August the Congressional Budget Office will probably adjust its estimates of this year's corporate tax collections downward for the second time in four months. Senator Kent Conrad, the new chairman of the Budget Committee, believes that the Budget Office will find this revenue estimate $23 billion lower. Since so little of the surplus was left, the Social Security and Medicare trust funds will have to shore up the shortfall.

Lawrence Lindsey, Mr. Bush's top economic adviser, maintains that Congress is as much to blame for this sudden budget crunch. He says increases in non-defense discretionary spending exceeded the amounts presumed by Mr. Bush's plan. Yet for many programs these increases are actually decreases when adjusted for inflation and population growth. One might argue that Congress did surprisingly well relative to Mr. Bush, since he had the easy job of touting a tax cut while Congress had the unpopular task of capping spending.

These recriminations are reminiscent of the 1980's, when Democrats in Congress blamed Ronald Reagan's tax cuts and defense buildup for the nation's vast deficits while the president blamed Congress for profligate spending on entitlement programs. The ballooning deficits of those days, however, will be dwarfed by the ones that arrive when Social Security and Medicare go into the red. Delving into their trust funds now would bring that financial crisis, usually assumed to be a decade away, several years closer.

There is no quick escape from this morass. Congress will probably have to raise its unrealistically low spending caps, and promised initiatives such as a Medicare prescription drug benefit are not even included in the current calculations. Routine extensions of expiring tax credits and spending programs, which the Budget Office's projections do not encompass, will create more shortfalls even if the economy makes a speedy recovery. The safest plan of action would be to trim the tax cut especially in its later, more regressive years. That seems unlikely with this president, though his father did manage to recoup some of the Reagan tax cuts. In the meantime, prudent Americans should try to sock some money away.

By cutting their taxes now, Mr. Bush has virtually guaranteed a costly future.

Don't Count on That Tax Cut
The New York Times


June 7, 2001

President Bush will sign his long-promised tax cut today. But conservatives shouldn't break out the champagne just yet, nor should liberals start taking their antidepressants.

Passing the cuts was easy. Mesmerized by projections of mountainous surpluses, few legislators could say no. But Congress and the president have turned their attention to crafting solutions to the nation's other problems, and now the real battle over taxes will begin. When the dust from this struggle settles, much of the relief the tax bill promises for later this decade is likely to be delayed, scaled back or repealed altogether.

Already, we know that there is bipartisan support in Congress for spending significantly more money on elementary and secondary education, defense and a Medicare prescription drug benefit. Other costly new proposals include a reform of the flawed farm support program, the president's energy plan and assistance to those without health insurance.

The costs of the tax cuts, the new initiatives and the government's ongoing activities are likely to strain available revenues. Barring an unexpected explosion of economic growth, the Treasury will have to dip into the Medicare and Social Security surpluses to pay for the income tax cuts scheduled for 2004 and 2006, the marriage-penalty relief that will start in 2005 and the elimination of the estate tax in 2010.

How can the Medicare and Social Security surpluses be protected? Paradoxically, the much-derided timing gimmicks in the tax bill, which keep its sticker price below the $1.35 trillion limit allowed by the budget resolution, will give Congress an opportunity to reconsider its generosity.

One gimmick involves the termination after 2005 of the deduction for college tuition and of relief for those facing the alternative minimum tax, both of which start this year. If Congress doesn't extend them, many Americans particularly those in high-tax states like New York will be hit with tax increases in 2006.

So lawmakers will be under pressure to renew the breaks well before they expire. If they want to continue the provisions, while also allowing the 2004 and 2006 income tax cuts and the full repeal of the estate tax to take place, they will have to tap into the trust fund surpluses even more.

As they consider this possibility, lawmakers will inevitably look ahead to the consequences of a second gimmick they tucked into the tax bill the Cinderella provision that magically terminates the entire act at midnight on Dec. 31, 2010, just to keep the 10-year costs of the bill within the budget.

Extending the fully implemented tax bill through the following decade at a cost of over $4 trillion would require digging deep into the Medicare and Social Security surpluses or drastically reducing basic government services. Not extending the bill would trigger a big tax increase in 2011.

Every politician knows that it is easier to take away promised tax relief that has not yet been enjoyed than to raise actual taxes or cut existing programs. And so they will undoubtedly take the more fiscally sustainable and politically prudent route of scaling back or rescinding the 2004 and 2006 income tax cuts and reducing, rather than eliminating, the estate tax before any of these cuts takes effect. These actions would protect the nation's ability to support retiring baby boomers while maintaining necessary government programs.

As the rhetoric about tax cuts rings forth today, rest assured that the final outcome is almost surely not yet decided. Some of the excessive cuts will probably never come to pass which is what happened in the 1980's, when Congress passed legislation in 1982, 1983 and 1984 that rolled back about one-third of Ronald Reagan's huge 1981 tax cut.

Robert D. Reischauer, president of the Urban Institute, was the director of the Congressional Budget Office from 1989 to 1995.

IMF says Bush tax cut may cost $2,500bn
The Financial Times


August 14, 2001

The International Monetary Fund said on Tuesday that President George W. Bush's landmark tax cut was likely to cost almost twice its headline figure of $1,350bn (950bn) and suggested the US would need to review it to avoid fiscal problems in the next few years.

In its annual report on the US economy, the IMF said the actual budget effect of the tax cut passed by Congress and signed into law by the president in June would be at least $2,500bn.

The higher figure was likely because Congress would be forced to extend some tax reductions that are formally due to expire within the next 10 years and spending would also probably exceed the limits imposed by the budget outline agreed by the president and Congress.

In their statement accompanying the report, the fund's directors said the tax cut might need to be reviewed.

"Given the uncertainties about the final costs of the tax cut, the ability to contain discretionary spending, and the accuracy of fiscal forecasts, [the IMF board] recommended that spending increases and multi-year tax cuts should be implemented flexibly so as to ensure that there will be sufficient resources over the medium term to finance these measures."

But the IMF had positive words for some aspects of the tax cut, praising the immediate fiscal stimulus it would provide for the flagging economy and saying it would improve incentives in the longer term.

The fund's views are unlikely to cause much concern among the administration's policymakers. US officials and the fund's economists have often found themselves at odds over the outlook for the US economy.

Given the scale of the US economy and Washington's outsized weight within the IMF, its reports do not have the same effect on the US as on smaller governments. "Other countries don't have the facility we in the US have of reading the Article IV report, saying 'thank you very much' and putting it straight in the trash can," was the view once expressed by Joseph Stiglitz, chairman of former president Bill Clinton's council of economic advisers.

The IMF's views will, however, provide ammunition for Democrats who have argued that the tax cut was too large and could jeopardise the Social Security state pension scheme and the publicly funded Medicare health insurance programme for the elderly. The report is also likely to be cited by some Republicans who want Congress to make more aggressive spending cuts.

The fund's directors praised the Federal Reserve's aggressive easing of monetary policy this year. But they were non-committal about the prospects for the US economy in the immediate future.

The US economy

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