November 23, 2003

November 23, 2003 | Commentary on Taxes

The Quiet Earthquake in Spending

Higher taxes are coming. The tax relief that President Bush and Congress have approved over the last two years is only temporary. Unless, of course, shortsighted lawmakers cut back runaway federal spending, which in the long run determines exactly how much tax revenue must be collected.

The federal government will spend $21,000 per household in 2003, up from $16,000 in 1999. Adjusting for inflation, this amounts to the largest four-year expansion of government in more than 50 years. Only during the height of World War II have our elected officials spent more per household than they will this year.

Taxes haven't risen yet because lawmakers have funded the entire spending increase with borrowed money. The Congressional Budget Office projects budget deficits of $401 billion this year, $480 billion in 2004, and $1.5 trillion over the decade. Even those estimates exclude the costs of offering a Medicare drug benefit, extending expiring tax provisions, and reforming the Alternative Minimum Tax.

Further, the estimates assume that discretionary spending - including defense - will grow no faster than inflation, rather than the typical 7.7 percent annual increase over the past five years. Factoring in those costs raises the projected annual deficits to between $600 billion and $700 billion through most of the decade.

Where did this expanding deficit come from?

Defense spending obviously played a role, and the new $87 billion proposal to fund continued efforts in Iraq and Afghanistan is a necessary but expensive contributor. A sluggish economy and tax relief also enlarged the deficit by limiting revenues.

But one cannot overlook the largest domestic spending spree since the Great Society. Mandatory spending will reach 11.1 percent of GDP this year, its highest level ever, and non-defense discretionary spending in 2003 will hit 3.9 percent of GDP for the first time since 1985.

Yet rather than balancing new homeland security spending with cuts elsewhere, lawmakers ramped up funding for education, health research and dozens of lower-priority programs such as the Denali Commission (an Alaskan public works program), the Power Marketing Administration, and the Foreign Agricultural
Service. The corporate welfare budget hasn't been touched, and the number of pork projects has doubled since 2000.

More darkness is likely before fiscal discipline dawns. Higher defense and homeland security spending are a permanent reality of the post-9/11 world. Social Security soon will face an influx of 70 million baby boomers. Rather than fix a Medicare program projected to grow 40 percent through the decade, lawmakers may add a new Medicare drug benefit that would represent the most expensive government expansion in 40 years. Education, health, highway and farm budgets expand every year. This is not sustainable.

The sudden collapse of fiscal discipline is rooted in three recent developments.

First, Republicans, still haunted by the 1995-96 government shutdown, consider spending cuts the new "third rail" of politics. The ambitious 104th Congress had sought such cuts to balance the budget, but oddly began by targeting the most popular programs, including many where the savings would be minuscule. Its popularity plummeted when President Clinton capitalized on their tactical errors by forcing a government shutdown. Rather than regrouping and changing tactics, shell-shocked GOP legislators dropped spending restraint altogether. In the White House, as well as among congressional Republicans, "Remember the 104th" is now considered checkmate against anyone foolish enough to suggest spending cuts.


Second, the balanced budgets of the late 1990s removed the most popular argument for spending restraint. Before then, lawmakers could use the deficit as a reason to keep spending for popular programs in check. But when a tax-revenue boom first balanced the budget in 1998, the floodgates opened. Gloomy deficit reduction was replaced with a sunny "balanced budget liberalism" that funded colossal education, health and social spending increases with soaring tax revenues from an economy that, it seemed, would boom forever. Economic reality has since returned tax revenues to their historical levels, but it's too late: Both parties now measure their compassion by how much they spend on these popular programs. No one wants the thankless job of setting limits and saying no.

Third, the nation's 50-50 partisan split has accelerated pandering and special interest politics. Republicans and Democrats entered the last four campaigns believing that congressional control would be won or lost on the last few thousand votes. When both sides move so close to victory, bold political risks become too dangerous. So empty pandering holds the broad coalition together, while federal spending buys off any remaining special interest that can provide the final winning votes. In 2002, Senate leaders identified farmers as the swing voters who would decide control of the Senate: The ensuing bipartisan bidding war resulted in the most expensive farm bill in American history.

Big government's new momentum may be acceptable to President Bush, who has recently been described as a "big government conservative" who couples tax relief with high government spending. But these goals are contradictory. All government spending must eventually be funded with taxes, and budget deficits only delay the inevitable taxes (with interest). This year's $374 billion budget deficit will add more than $3,000 to the average household's future tax burden.

If the budget deficit reaches $600 billion to $700 billion, the annual tax increase will top $6,000 per household. Unless they balance tax relief with spending cuts, President Bush and Congress will leave a legacy of temporary tax relief followed by permanently higher taxes.

Some insist that economic growth alone will solve the deficit problem. It's true that the recent tax rate cuts will aid economic growth and tax revenues by providing new incentives to work, save and invest. But the CBO's dire projections already assume revenue growth of 13 percent in 2005, 10 percent in 2006, and approximately 6 percent thereafter. The economy won't grow the budget into balance any time soon.

These prolonged deficits will make it difficult if not impossible to further reduce the tax burden on American families. Increasing deficit projections led the normally tax-averse President Reagan to raise taxes in 1982. This past spring, the Senate chopped the president's $726 billion tax relief package to $330 billion because Sens. Olympia Snowe and George Voinovich expressed fear that federal revenues wouldn't keep pace with runaway spending. President Bush may now have to expend more energy protecting previous tax cuts than proposing new ones. Broad-based tax increases may remain a political "third rail," but class-warfare calls to raises taxes on the rich may find an increasingly receptive audience.

The only alternative to tax hikes is spending restraint. An obvious first step: Scrap the proposed budget-busting Medicare drug benefit and start over. Now is not the time for the largest expansion of government since the Great Society. Targeted help to poor seniors, combined with real Medicare reforms, makes more sense than creating a new $7 trillion liability that funds many seniors who don't need the benefit.

There are other ways to save money: The $90 billion corporate welfare budget can go, along with another $50 billion in waste, fraud and abuse identified by the Heritage Foundation. Create an independent commission to identify outdated and ineffective programs ripe for elimination.

We need look no farther than Western Europe, where politicians have promised to provide for all their citizens' needs in exchange for higher taxes and bigger government, to see the consequences of excessive spending and taxation. Western Europeans have incomes 40 percent below Americans and unemployment rates twice as high. They also lose 50 cents out of every dollar earned to taxes.

Instead of accelerating down that road to serfdom, lawmakers must learn how to win elections by methods other than promising federal spending. And they can do it in a positive way - emphasizing, for example, how letting families keep more or their own money would make housing, food, health insurance, retirement and their children's education more affordable.

Low taxes and a dynamic free market helped make America an economic superpower. Why let excessive government spending by shortsighted and undisciplined lawmakers threaten that status?

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

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

Copyright 2003 Union-Tribune Publishing Co.