Forget the Tax Cut
DO we really want to balance the federal budget? All the Washington rhetoric says yes, but the tax-cutting proposals of both Congress and the president imply the opposite.
I'm a businessman, and business has no love for taxes. But businessmen are also realists who can do arithmetic. Last June the business leaders who form the nonpartisan Committee for Economic Development (CED) issued a report that opposed tax cuts until we secure a balanced budget. While CED has been the only national business-led organization to take this position, a survey of The Business Council in May indicated that two-thirds of that business leadership group also opposed using spending cuts to finance tax reduction.
The arguments for eliminating, or drastically paring back, the tax cut have become even more compelling as congressional and administration negotiators finally come to the table this week.
First, tax cuts now will greatly reduce the chances of achieving (as opposed to projecting) a balanced budget. A budget enacted this year that shows balance in 2002 will almost inevitably produce a large deficit when that time comes. This is because the government's projections have consistently underestimated distant-year deficits throughout the 20 years in which they have been made. This is not a reflection on the estimators; rather, it is testimony to the inherent difficulty of predicting the future, which will surely produce a recession and other unpleasant surprises during the next seven years.
For this reason, the question of which economic projections are "correct" is really beside the point. Any business person doing long-term planning knows it is essential, for just these reasons, to use especially conservative, prudent assumptions. Yet the budget negotiators are doing exactly the opposite. They are edging toward using less-prudent assumptions in order to conjure up the additional revenues needed to "pay for" tax cuts.
Second, the proposed tax cuts make it likely that deficits will explode in the years just after the budget is supposed to be balanced. Several of the proposals in Congress's bill are backloaded by design. They minimize revenue losses during the first seven years, with huge revenue reductions thereafter that "don't count" in Congress's arithmetic. Annual revenue losses average $32 billion from 1996 to 2002, but explode by 63 percent (to average $52 billion) in the three succeeding years. Planting a fiscal time bomb is not the way to secure permanent fiscal balance.
Finally, to finance these tax cuts, we are being driven to reduce the deficit in ways that undermine the purpose of deficit reduction. Lower deficits are not an end in themselves. They are a means to higher productive capacity and living standards through enhanced national saving and investment. But deep cuts in public infrastructure and research support, reduced nutrition and medical care for needy children, and higher taxes on the working poor will diminish rather than enhance our productive capacity. Who seriously believes that the additional tax cuts "paid for" by the most injurious of these measures will provide net benefits to our society?
Both Congress and the president should be commended for pursuing a constructive redirection of our fiscal policy, but success is by no means assured. The budget negotiators face a monumentally difficult task. Much of the difficulty, however, is self-inflicted through political commitments to unwise tax reduction on both sides. To common-sense folks who really want a balanced budget, the next move is a no-brainer. Cut the tax cut.