Tax Notes

The Real Fiscal Danger

The Administration's budget includes a chapter entitled "The Real Fiscal Danger," which highlights the projected imbalances in Social Security and Medicare. Ironically, the budget does not include any specific steps to eliminate or even reduce those imbalances. It does, however, propose substantial tax cuts that exacerbate the longterm budget deficits it so vividly displays. Especially since the tax cuts divert revenue that could have instead been used to grease the wheels of Social Security or Medicare reforms, the Administration's attitude that tax cuts are the solution to every social and economic problem is itself a significant contributor to the real fiscal danger.

The Administration's dogmatic stance on long-term tax cuts regardless of circumstances is at odds with history. Over the past 20 years, when projections of budget deficits grew significantly, policy makers often responded in a fiscally responsible manner, legislating combinations of tax increases, spending cuts, and stringent budget rules. In 2001, official projections of ever-growing surpluses generated bipartisan support for tax cuts. Currently, however, despite projections of increasing and substantial short- and long-term budget deficits, the Bush Administration has proposed tax cuts that are large, permanent, and regressive. In economic terms, this strategy represents a substantial fiscal gamble.

A key question is the likelihood that this policy would succeed if it were implemented. For current purposes, we define success to mean that the policy at least (a) restores economic growth; (b) does not increase burdens placed on future generations; and (c) is at worst distributionally neutral. President Bush has enunciated similar goals. In the 2003 State of the Union address, the President said that "Lower taxes and greater investment will help this economy expand? The best way to address the deficit and move toward a balanced budget is to encourage economic growth." He also emphasized that "...we will not pass along our problems to other Congresses, to other presidents, and other generations." In 1999, as a Presidential candidate, then-Governor Bush criticized Congressional Republicans for attempting to "balance their budget on the backs of the poor." The combination of these statements suggests that by the President's own standards, the Administration's budget strategy would be a success only if it generated significant economic growth and significant spending restraint, and the effects on lowerand middle-income households were neutral at worst.

This is the second in a series of columns that addresses this budget strategy. In Gale and Orszag (2003), we provide estimates of the budget outlook under the Adminstration's proposals. Future columns will address the effects of the tax cuts on growth, spending levels, and distributional issues. In this column, we provide perspectives on the magnitude of the proposed tax cuts and the severity of the underlying budget situation.