February 18, 2002

February 18, 2002 | Commentary on Taxes

Don't Just Cut Taxes -- Cut Spending

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 attached.

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 increases.

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 recession.

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 surpluses.

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.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

Originally appeared in the San Diego Union Tribune