July 26, 2008

July 26, 2008 | Commentary on Taxes

'Roll back the tax cuts': An exercise in shady financing

It's an election year, so politicians are merrily promising voters all kinds of shiny new programs.

Promising government goodies is easy. Paying for them is hard.

Luckily, liberals have discovered a source of inexhaustible funding. It's called "Rolling back the Bush tax cuts for the rich." Apparently it can pay for, well, everything.

Expand health insurance coverage? No problem, says Sen. Barack Obama, just roll back the tax cuts. Plug the funding hole for Social Security? Roll back the cuts. Fix aging infrastructure? Roll 'em back. Why, we can even cut taxes for the middle class if we just roll back the rich folks' cuts.

To those on the left, "the Bush tax cuts for the rich" are the golden goose that keeps on laying. But just like that goose, it's a myth.

Here's why. Repealing the part of the 2001 and 2003 stimulus packages that eased taxes on wealthier Americans, while retaining breaks for other households, could indeed generate billions in new government revenues - about $50 billion in each of the next two years. That's serious money - enough to, say, fund extended health coverage for two years without adding to the deficit.

But there's a catch. The goose stops laying in two years. The tax cut is already set to expire after 2010. After that, the IRS starts soaking the rich again. Moreover, the proceeds from that soaking are already figured into those gloomy, long-term spending and deficit forecasts. In other words, it's already spoken for.

But that doesn't faze the roll-back crowd. They simply respond with "creative" accounting.

Here's their spin: "Well yes, it's true that the Bush cuts are already scheduled to roll back. And it's also true that even in Washington you can't repeal the same cut twice to raise money. But we should assume that Congress will act to restore the cuts once they expire. Then, we can repeal the restored cuts, and that will generate billions in "new" revenue.

I don't make up this stuff. They want us to assume that Speaker Pelosi & Co. will pass big tax breaks for wealthy Americans. And we are also to believe that - maybe even on the same day - they'll "roll back the tax cut." Somehow, magically, this now-you-see-it, now-you-don't tax cut will raise billions from the rich. This way, politicians can pay for all their proposed new spending without adding any red ink. Understand?

It's certainly a creative way to raise money. Why not make it work for you?

Say you want $20,000 for a new car. No sweat. Just ask your boss to (1) cut your salary by $20,000 and (2) give you a $20,000 raise the next day. What's not to like? He has repealed your pay cut by giving you a raise. And, according to the politicians' logic, you now have an extra 20 grand to spend on a car. You're happy. The boss is happy. The golden goose lives on.

In the real world, of course, this kind of creative financing leads normal people to bankruptcy and accountants to jail. In Washington, it pays for new programs.

But shady accounting goes only so far, even in Washington. Pols may fast-talk their way through TV ads or election debates, but the Congressional Budget Office, the non-partisan body that officially "scores" legislative proposals, is not easily duped. And in report after report the CBO blows the whistle on this flim-flam. The CBO states the simple truth: "Rolling back the Bush tax cuts" does not generate new money after 2010 because they were never projected to exist past then.

It's tough to pay for more expansive health programs (or other permanent entitlements, for that matter) with nonexistent revenues. It's especially hard when government can't even make good on its existing promises without either piling up ruinous debt or imposing huge tax hikes for all taxpayers, not just the rich.

According to the CBO, raising federal income tax rates to pay for current programs would require all rates to nearly double over the next 40 years. So by the time today's newborns hit middle age, lower-income earners would be paying a 19 percent rate rather than today's 10 percent rate. Middle class earners would pay 47 percent, not today's 25 percent. High earners - be they individuals or corporations - would be paying 66 percent, instead of 35 percent. And that's before any state taxes or payroll taxes.

Little wonder the CBO calls this scenario "not economically feasible." It would "significantly reduce economic activity" and lead to serious tax evasion, a recent letter from the CBO contends.

Of course, evasion is with us now. Politicians who suggest bogus ways to "pay" for their election-year promises are evading fiscal reality and the obligation to provide honest leadership on serious policy matters.

It's time they faced the fact that their "creative" accounting simply doesn't add up.

Stuart Butler is vice president for domestic policy issues for The Heritage Foundation.

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First appeared in TheOlympian.com