July 16, 2004 | WebMemo on Budget and Spending, Taxes

Federal Spending and the Bush Tax Cuts

Does the growth in federal spending jeopardize the Bush tax cuts?
June 18, 2004
               

Panelists

Brian Riedl, Hermann Fellow in Federal Budgetary Affairs at The Heritage Foundation

Chris Edwards, Director of Tax Policy Studies at the Cato Institute

John Berthoud, President of the National Taxpayers Union              

 

Moderator: Alison Fraser, Director of the Roe Institute at The Heritage Foundation

 

Brian Riedl

Hermann Fellow, The Heritage Foundation

Does the growth in federal spending jeopardize the Bush tax cuts? Short answer: Yes. In fact, it is already happening. But this is not a surprise. This is a predictable result of a 25 percent expansion of the federal government over the last three years.

 

In the long term, increases in government spending must come from somewhere, and if lawmakers stubbornly refuse to reign in runaway spending, taxes will go up.

 

Less than half of all new spending in the last three years has had anything to do with 9/11. We've had the largest farm bill in American history. We've had the largest education bill in American history. We've had a 20 billion dollar bailout of the states. And lastly, we've had a Medicare drug bill representing the largest expansion of government in the past four years.

 

We're spending about $60 billion on corporate welfare and about $45 billion on homeland security. If budgets are about setting priorities, what does that say about our priorities?

 

And it gets worse: Social Security and Medicare, as we all know, are growing at an unsustainable rate that in the next couple decades will require the current equivalent of a $10,000 per household tax increase. So if we're not scared by our federal government spending $21,000 per household, how do we feel about our federal government spending $31,000 per household? That's what we face down the road unless spending is brought in line.

 

The three important things to do: set priorities, which means eliminating lower priority programs; reform the entitlements; and fix the budget process.

 

Chris Edwards

Director of Tax Policy Studies, Cato Institute

 

Consider the president who is going to enter the White House in 2009. In 2009 the 10-year budget projections will look all the way out to the year 2020. It is going to look absolutely horrendous because of the exploding cost of entitlements. Between now and 2020, the number of elderly who are demanding Social Security and Medicare will rise 50 percent, but the number of workers who support them will only rise 16 percent.

 

We have a gigantic crisis that starts just a few years down the road.

 

If it is a liberal President elected in 2009, the answer to the financial crisis will be easy: raise taxes. But even if it is a conservative, there is going to be huge pressure to raise taxes. I don't think Bush will raise taxes if he is reelected, but unless he seriously cuts spending and reduces the deficit, the next president is going to have a ripe excuse for a big tax hike just like Bill Clinton did in 1993.

 

Consider what happened in the 1980s. Soon after Ronald Reagan came into office, the economy went into recession and the deficit ballooned. So as soon as the ink was dry on the big 1981 tax cut, Reagan was put into a corner by deficit hawks in Congress and his own Administration who repeatedly pushed tax hikes for the rest of the 1980s.

 

Will we lose some of Bush's tax cuts? In fact, we already have. The first casualty of high spending has been the 50 percent depreciation bonus provision. This loss is unfortunate because it is a key component of major tax reform. The second casualty is Alternative Minimum Tax repeal. Alternative Minimum Tax reform would have been a clear winner for Bush if he had put it forward, but he has this gigantic deficit problem. The biggest casualty, unfortunately, could be fundamental tax reform. The thing with fundamental tax reform is that it creates a lot of winners and losers. So what you need is major tax reform that is a revenue loser to grease the skid.

 

John Berthoud

President, National Taxpayers Union

 

From 1994 to 2004, in real terms, spending at the federal level has increased by 30 percent. This increase isn't just in defense and homeland security. For example, in the last five years the Department of Commerce has increased spending 23 percent, the Department of Agriculture 24 percent, and the Department of Labor 82 percent.

 

Projections right now for fiscal year 2005 show that there has been a real increase in revenue of 25 percent. This is very healthy revenue growth for just one decade. A lack of revenue is not the culprit in our current deficit; it is a spending problem.

 

We have already seen tax increases through the Alternative Minimum Tax. The problem is that it was not indexed for inflation, and so more and more Americans are being affected by the Alternative Minimum Tax. In fact, tens of millions of Americans are going to be swept into the Alternative Minimum Tax, that is, pay higher taxes than they otherwise would, in the next few years. Unfortunately, because of the deficits, we have not reformed the Alternative Minimum Tax. So this year, next year, and in the coming years, millions of Americans are going to be paying higher taxes.

 

The Medicare bill we enacted last fall with 8.1 trillion dollars in unfunded liabilities is a very serious threat for higher payroll taxes. Maybe not this year, maybe not next year, but five or ten years down the road…tax increases to pay for the legislation we just passed are going to be in play.

 

Questions from the Audience

 

Question: Has there been any veto on any bill by this Administration?

Mr. Riedl: No. There has not been a veto yet of a bill by President Bush, spending or otherwise.

 

Question: Do you find it disappointing that the President hasn't been further out in front in repealing the AMT?

Dr. Berthoud: It is very disappointing. The problem is if we were not facing big deficits, in nominal dollars, we would be having a very different debate. If the President had vetoed a few appropriation bills…and deficits were not where they are, the President could be pushing both his agenda of keeping the tax cuts permanent and eliminating the Alternative Minimum Tax.

About the Author