How politics helps pump budget-deficit balloon

Just plain weird! That describes America's tax and budget situation. Among the oddities:

• Under the Republicans, by tradition fiscally conservative, federal spending in the past two years has surged at more than double the rate averaged under President Clinton, a Democrat.

• The nation's at war, spending more than $4 billion a month in Iraq and Afghanistan. Yet both parties are pushing for more tax cuts.

• Politicians of all stripes claim the burden on taxpayers is too high. But the federal tax bill last year fell to 16.5 percent of the nation's gross domestic product (GDP). That's the lowest since 1947.

What's going on? Washington is blithely ignoring the fact that tax cuts that produce deficits have to be paid for in the future. And because today's huge federal budget deficits are "structural," and not primarily related to the business cycle, and because the baby-boom generation is about to retire, reduction of those deficits is becoming ever more urgent.

"Someone, somewhere, at some time will have to pay for them," notes a study released Wednesday by the nonpartisan Center on Budget and Policy Priorities (CBPP) and the Tax Policy Center (TPC).

Worse, the biggest bill will eventually fall on the bottom three-quarters of American households, the study finds. They will lose out on a net basis from the tax cuts, because federal spending reductions or some form of future tax hikes will more than eat up benefits from President Bush's tax cuts. Meanwhile, millionaires will gain an average of nearly $135,000 per year.

Such a rich-poor contrast would normally be a highlight of a Democratic presidential campaign. And in fact, the presumptive Democratic nominee, Sen. John Kerry, proposes repealing Bush tax cuts for households with incomes greater than $200,000. But combining that with Senator Kerry's other tax proposals would still mean a reduction in federal revenues by at least $440 billion over 10 years, the TPC reckons.

"That's what passes for fiscal responsibility these days," says Bob McIntyre, head of liberal-leaning Citizens for Tax Justice (CTJ) in Washington. "Kerry's saying, 'Vote for me. I'm only half as bad as the other guy.' "

Over the past three years, President Bush has signed into law tax cuts totaling more than $1.7 trillion over 10 years. His fiscal 2005 budget proposed additional cuts of $1.1 trillion through 2014.

The cuts make political sense because they help voters, at least in the short run. The average family of four paid 5.3 percent of its income in federal income tax last year. That's nearly half the 10.3 percent it paid in the 1980s.

Then there's the issue of fairness. Bush has succeeded in knocking down personal taxes on investment income to 9.6 percent. That compares with an average 23.4 percent tax rate on wages and other earnings, if Social Security and Medicare taxes are included. Such a tax system favors richer people, who earn far more from bonds, and not lower-income folk working in offices and factories for a living.

Under Bush, the tax system has become flatter. The rich will pay 4.3 percent less of their income in taxes this year. If all taxes are included (federal, state, and local), the top 1 percent of households pays 32.8 percent of their income in taxes, the middle 20 percent of households pays 27 percent, and the poorest 20 percent pays 19.7 percent, notes the Institute on Taxation and Economic Policy in Washington.

The big problem is that the federal government is operating deep in the red. With a goal of halving the deficit by 2009, the White House has sent out a memo advising virtually all agencies in charge of domestic programs to anticipate funding cuts for fiscal 2006. Leaked to the Washington Post last month, the memo got big press play and alarmed those whose budget ox will be gored.

With about 75 percent of the budget sacrosanct to the White House and exempt from spending cuts, the cuts cited for 2006 would save maybe $4 billion - "barely" affecting the anticipated deficit next year of $300 billion to $400 billion, notes Stan Collender, a budget expert with Financial Dynamics Business Communications, a Washington consulting firm.

The cuts get much worse after 2006, according to the Bush budget of last winter.

If the next president takes no action to reduce the ongoing deficits, the ratio of federal debt to the GDP will explode. Fearing for their money, investors in bond markets or international investors could refuse to buy as many of Uncle Sam's debts, forcing the US to move toward fiscal responsibility.

As things stand now, the Congressional Budget Office projects more than $4 trillion in total deficits during the next decade, doubling the nation's public debt to $8.4 trillion.

That's raising alarm bells.

But the Republican-controlled Congress is pondering not adopting a budget plan this year, despite any political embarrassment. In the strange world of Washington budgetmaking, not having a budget resolution could actually impose some discipline.

It works this way: If the House and Senate cannot agree on a budget resolution, and so far they have not, then a conference committee of the two houses cannot pass a reconciliation bill later in the year that might include big tax cuts. This is the only bill not subject to a Senate filibuster that would need 60 votes to end, opening the way for passage of a reconciliation bill needing only 50 votes to pass. Up to now, four centrist Senate Republicans have joined with Democrats to block more tax cuts without providing offsetting revenue additions.