Faith-Based Budgeting

Peter R. Orszag and
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

April 1, 2003

Current economic prospects feature a stagnant economy, a war, a rapidly
deteriorating short-term fiscal outlook, and a substantial long-term fiscal problem. When
faced with similar constellations of problems in the past, policy makers of both parties
have often acted in a fiscally responsible manner, or at least in a fiscally responsible
direction. Ronald Reagan agreed to income tax hikes in 1982 and 1984 (as well as social
security tax hikes in 1983) when it became clear that the combination of the 1981 tax
cuts, increased defense spending, and a slowing economy was wreaking havoc on federal
finances. In 1990, in the face of continuing projected deficits, a bipartisan budget
agreement raised taxes, cut spending, and imposed new restrictions on spending increases
and tax cuts. In 1993, in the face of continuing economic and fiscal problems, Democrats
in Congress raised taxes, cut spending, and extended the budget rules.

Faced with a similar set of economic problems—except that the current situation
is more dire because the baby-boomers’ retirement is more imminent—the Bush
Administration is taking a dramatically different approach. The Administration’s fiscal
year 2004 budget proposes massive tax cuts. Several features of this approach are worth
noting. First is the existence of permanent tax cuts rather than any effort to shore up the
long-term fiscal problem. Generally, in a situation with large and growing long-term
deficits, one might expect a “moderate” strategy to involve a mix of long-term spending
cuts and tax increases, and an “extreme” strategy to involve only spending cuts or only
tax increases. The Bush Administration, however, has gone much farther than the
extreme strategy. As a result, the massive tax cuts imply either spending cuts that cover
more than 100 percent of existing budget shortfalls or significant increases in long-term
budgetary problems. (The budget does not specifically identify the relative emphasis on
these two choices after five years, but that failure does not alter the underlying tradeoffs.)
Second, the tax cuts are heavily weighted toward future years. That is, they are long-term
tax cuts that will dramatically exacerbate long-term fiscal problems. Most of the
proposed tax cuts have nothing to do with the current slowdown. Third, they are heavily
weighted toward high-income taxpayers—that is, they are regressive.

The Administration does pay lip service to the goal of cutting the deficit, but the
words are hollow. The Administration’s own estimates show that its tax cuts will
generate permanent, increasing deficits and an unsustainable budget path. And, on purely logical grounds, it is difficult to reconcile the Administration’s views that the tax cut in
2001 was needed in order to reduce the surplus, and that the same tax cuts, accelerated
and made permanent, are needed in 2003 to raise the surplus (reduce the deficit).

In light of these glaring inconsistencies, the continual pursuit of large, regressive
tax cuts under any and all circumstances can hardly be attributed to logic or any evidence
that their effects will resolve the underlying problems. Rather, the Administration’s fiscal
policy seems to be operating on sheer faith—a political ideology that tax cuts for high-income
households are always good.

Even faith-based policies, however, can and should be examined on economic
criteria. In economic terms, the Administration is taking a massive fiscal gamble that
significant tax cuts in the face of large projected deficits are worth the risks. The gamble
itself is based on several implicit claims: the tax cuts are relatively modest in size; the
negative effects of such a policy are manageable, even in light of the retirement of the
baby boomers; the tax cuts will spur sufficient growth and spending restraint to bring
about fiscal balance; and the impact on lower- and middle-income households either will
be salutary or can be ignored.