February 18, 2002 | Commentary on Taxes
Perhaps you're one of those people who think "everything
changed" after Sept. 11. Or maybe you believe things are more or
less the same. Either way, you'll find the proof you need in
President Bush's budget.
It does provide a good start toward shifting the federal budget
to reflect new priorities. The president fully funds defense and
national security priorities and keeps intact the pro-growth tax
cuts Congress approved last year. Unfortunately, though, he
abandons the tradition of reducing wasteful domestic spending in
war time, which could undercut his determination to make future
deficits "small and short-term."
Few can argue with his proposed budget increases for homeland
security and defense. Giving an extra $48 billion to the Defense
Department will boost military pay by more than 4 percent and fix
the one in five military houses that are now falling apart. The
defense budget also includes new investments that would give our
troops even greater technological advantages on the battlefield.
Past investments in military technology brought great success in
Afghanistan with a small number of casualties, and we owe our
troops a continued commitment to their success and safety.
Another commendable feature of the president's budget is an $18
billion hike for homeland security, which will make airports safer,
provide local grants for emergency response equipment, strengthen
the nation's borders, and fund research into preventing a
biological or chemical terrorist attack.
If only the rest of the president's budget, which would let
domestic programs grow by approximately 2 percent, could be so
easily defended. Asking taxpayers to fund more domestic spending
while they're being asked to pay for a war will keep taxes too
high, harm the economy and cause a budget deficit.
Refusing to make necessary cuts means repudiating the example President Franklin Roosevelt set during World War II, when the domestic budget was cut by 35 percent. The same thing happened during the Korean War, when President Truman cut domestic spending by 25 percent in just one year.
In this respect, the Bush budget hews more closely to the course
taken by President Lyndon Johnson, who increased domestic spending
while fighting the Vietnam War. Of course, this "guns and butter"
budget put America on the road to constant budget deficits, which
weren't tamed until the late 1990s.
It's true that holding domestic spending to a 2 percent increase is more fiscally responsible than past free-spending budgets. Indeed, it's half the increase President Bush proposed last year. But if we want to keep taxes low and give our national security needs the attention they deserve, we need to cut further.
You don't have to look far for places to cut. The president's
budget rates 23 of the 26 major agencies "unsatisfactory" in
allocating dollars to programs that work, and 21 of them are so
financially mismanaged that auditors cannot even make sense of
their books. It includes a 10-year, $73 billion increase in
agriculture subsidies that function basically as corporate welfare
for "agribusinesses," large farms earning more than $250,000 per
year, and millionaire "hobby farmers" such as Scottie Pippen, Ted
Turner and David Rockefeller.
Amtrak, the federal boondoggle that is still not profitable
despite repeated federal bailouts, would receive yet another
lifeline in the Bush budget. The budget also fails to devolve to
the states responsibilities handled by the Department of Housing
and Urban Development and the Federal Highway Administration, which
each collect billions in tax dollars, administratively shuffle them
around, and then send the money (minus administrative waste) right
back to local governments with complex and expensive strings
Entitlement programs such as Social Security and Medicare, whose
long-term costs threaten to bankrupt the federal budget, aren't
structurally reformed at all. There are hundreds of other wasteful,
outdated, duplicative and expensive programs that could be cut to
give some relief to beleaguered taxpayers.
Some of the president's critics on the left, though, argue that
domestic spending should be increased even more. Yet since 1992,
the domestic budget has increased by 61 percent, while household
budgets have increased just 38 percent. Programs whose budgets have
been increasing this rapidly certainly can afford to have their
budgets frozen or trimmed back without triggering the catastrophic
results predicted by those who only want more funding
A typical example is the Labor Department, whose budget has
grown an astounding 95 percent since 1998. Yet big-government
advocates worry that the president's proposed 1 percent cut would
somehow render the department unable to function.
Those who urge more domestic spending haven't spelled out how
they would pay for it. The president's budget projects an $80
billion deficit for 2003, and neither party has shown any interest
in increasing the deficit beyond that level. That leaves two
options for those who want more dollars for domestic programs:
scale back defense spending or raise taxes.
No one wants to call for cutting defense spending during a war,
so big-government advocates opt for tax hikes instead. We should,
they say, repeal or postpone parts of the tax cut. But raising
taxes won't provide the revenue needed to fund additional spending
or balance the budget. Instead, it will prolong the
President Herbert Hoover found this out in the early 1930s. The
economy was in recession, causing tax revenues to run dry and
sparking deficits. His solution? Raise income tax rates and
tariffs. The economy collapsed, the budget ran bigger deficits, and
the recession turned into the Great Depression.
Fifty years later, President Ronald Reagan was in a similar
situation. Unlike Hoover, though, he helped enact legislation that
brought tax rates to their lowest levels in years. Once the cuts
were phased in, the economy began one of the longest peacetime
expansions in our history.
But, critics charge, Reagan's approach caused budget deficits.
Wrong: The deficits resulted from runaway federal spending. Even if
Congress had just limited spending increases to the rate of
inflation, it would have run budget surpluses in 28 of the 32
fiscal years since 1970. Instead, it increased annual spending by
852 percent -- 120 percent above the rate of inflation -- and the
federal government wound up running 28 deficits and just four
Unfortunately, most lawmakers seem to misunderstand the
relationship between the budget and the economy. They think that
raising taxes will transfer more money to Washington and ultimately
balance the books or fund new spending.
But while higher taxes are busy swelling the government's slice
of the economic pie, they're also shrinking the size of the pie
itself. The price of working, saving and investing rises, and
people find it harder to start, continue or expand a business. Soon
they can't afford to hire the extra workers they had hoped to hire.
Economic activity declines -- and so do tax revenues.
President Bush understands this. That's why he also said that
Congress can promote "long-term growth" if it will "make these tax
cuts permanent." If Congress were to repeal them, it will be
discouraging the very economic activity we need to end this
recession -- and balance the federal budget.
The president has noted that deficits "will be small and short-term so long as Congress restrains spending and acts in a fiscally responsible way." His budget accomplishes this on taxes and defense. Too bad the same can't be said on the domestic spending side.
Brian Riedl is the Grover M. Hermann fellow in federal budgetary issues at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.
Originally appeared in the San Diego Union Tribune