November 23, 2003
By Brian M. Riedl
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
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
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
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
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
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
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
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?
is Grover M. Hermann Fellow in Federal Budgetary Affairs in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Copyright 2003 Union-Tribune Publishing Co.
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.
Brian M. Riedl
Grover Hermann Fellow in Federal Budgetary Affairs
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