In his State
of the Union speech Tuesday night, President Bush plans to call
for making all of his tax cuts permanent. That will cost at least
$2 trillion over 10 years - probably nearer to $4 trillion - and
kill chances for balancing the budget.
Arguably,
Bush's tax cuts brought the economy out of the 2001 recession,
but budget experts say they won't pay for themselves. Nor can
the economy grow its way out of the coming baby boomer retirement
crisis.
The responsible
answer to the nation's fiscal fix is to cut back on Social Security
and Medicare benefits, preferably on a means-tested basis, and
to raise taxes. But in the current polarized environment in Washington,
D.C., Republicans want only tax cuts and benefit reductions. Democrats
want bigger benefits - a richer prescription drug plan for seniors,
for instance - and tax increases. The twain never meet. They just
shout at each other.
To me, the
most sensible first step to fiscal sanity would be to reform,
but not repeal, the estate tax, which could save as much as $400
billion over 10 years. But Republicans are wedded to the idea
of repealing what they call the "death tax," even though
it applies to only the richest 0.5 percent of taxpayers.
The Congressional
Budget Office's new budget outlook, issued last week, shows that
the federal budget actually could be balanced and go into small
surplus in 2012 if Bush's tax cuts are not extended.
But if they
are all made permanent - and some of them should be - the deficit
rises $300 billion to $350 billion a year from 2012 to 2016, the
end of the CBO budget window, for a net 2007-2016 cost of $2 trillion,
including interest.
And this
does not count the cost of adjusting the Alternative Minimum Tax,
which practically everyone agrees should not burden the middle
class. The CBO estimates that doing this will cost $630 billion.On
top of current deficit projections in the $250 billion range from
2006 to 2011 - and these may be optimistic, considering that this
year's deficit may be $360 billion - the total 2007-2012 debt
pileup could be $3.8 trillion.
Such deficits
are sustainable in a growing economy - they'd amount to 2 percent
to 3 percent of the gross domestic product - but the CBO and other
budget projectors all anticipate a ballooning of health-related
costs as the baby boomers retire, threatening to swallow the entire
federal budget by 2050.
As the CBO
put it, beyond 2016, Social Security, Medicare and Medicaid "will
exert pressures on the budget that economic growth alone is unlikely
to alleviate."
Its report
concluded that "a sizable reduction in the growth of spending,
and perhaps a sizable increase in taxes as a share of the economy
will be necessary for fiscal stability to be at all likely in
the coming decades."
Contrary
to GOP theology, tax cuts don't pay for themselves. "They
don't," former CBO Director Douglas Holtz-Eakin told me in
an interview. And, asked what kind of productivity and GDP growth
rates it would take to pay currently promised retirement benefits,
he said, "There aren't any on this planet that I am willing
to put out there.
"You'd
have to have one-in-100 years productivity growth and you'd have
to have it every year for 50 years. You don't make it. Don't even
think about it."
A CBO study
last year showed that, at best, a 10 percent across-the-board
reduction in income tax rates would recover 22 percent of the
revenue it cost through supply-side and stimulative effects in
the first five years. That is, it would cost 78 percent of its
face amount.
But in the
second five years, depending on economic conditions, it would
produce no revenue recovery and increase the deficit by 5 percent
to 32 percent.
Administration
officials say that Bush plans to recommend new reductions in Medicare
and Medicaid benefits at the same time he proposes much bigger
long-term tax reductions. Some tax cuts surely should be extended,
including creation of a 10 percent rate that took millions of
lower-income earners off the tax rolls entirely, as well as reductions
in capital gains and dividend tax rates designed to encourage
investment.
But if there's
a tax break that shouldn't be permanent, it's the elimination
of the inheritance tax, which not only discourages charitable
giving but also benefits only the very richest families in the
country.
Most of those
families can afford to buy life insurance policies to offset taxes
- which is why the insurance industry opposes repeal. "I
am institutionally and intestinally against huge blocks of inherited
wealth," Frank Keating, president of the American Council
of Life Insurers, said last year. "I don't think we need
a Viscount of Enron or the Duke of Microsoft."
Actually,
the father of the king of Microsoft, Bill Gates Sr., is one of
the foremost opponents of complete "death tax" repeal.
Under current law, increasing numbers of wealthy families will
be shielded from paying inheritance taxes until 2009. Then, for
one year, all will be. But the next year and thereafter, all estates
worth more than $1 million will be taxed at a 55 percent rate.
Clearly,
the law should be changed - but not to extent of total elimination.
A middle-ground solution that excludes the first $3.5 million
from tax and hits the remainder at the top individual rate of
45 percent would cost about $360 billion over 10 years - a lot
less than $1 trillion, the cost of repeal.
Opponents
of the estate tax say it amounts to double taxation of income.
But the fact is that most of the money in big estates is accumulated
capital gains that have never been taxed.
Bush won't
propose tax increases, but Congress can impose them by not agreeing
to a permanent extension of his tax cuts. That, plus some cutbacks
in entitlement benefits, could put the country on the road to
fiscal health.
Mort
Kondracke is the Executive Editor of Roll Call.
