August 24, 2003

Will tax cuts get the ax?

By: Jason Mattera

Once President Bush signs the Republican-backed Medicare and prescription drug bill into law, he will have helped erect the largest obstacle to the conservative tax cut platform to date. With the President supporting a burgeoning health care spending agenda that was unthinkable just a few years ago, will it force his tax agenda to end up on the cutting room floor?

A look at the numbers shows just how serious a question this has become. The proposed bill will immediately result in the biggest expansion of unfunded entitlements since the Great Society programs of Lyndon Johnson over 40 years ago. That’s not the worst of it: The projected 10-year, $400 billion in outlays the bill calls for are only the beginning. In strikingly candid remarks to the Boston Globe, Ted Kennedy acknowledged as much, and vowed to use it as a base for further increases. “This [Medicare bill] is only a down payment. Hopefully, we can use this down payment in an effort to fulfill our responsibility to seniors over the years,” said Kennedy. Current trends favor Kennedy’s stance. Since Medicare’s recipient population is expected to double once the baby boomers retire, conditions for increased spending will be well nigh inescapable.

To give some historical perspective, in 1965 Medicare’s projected annual cost was only said to be $10 billion. Today, Medicare costs a whopping $244 billion a year. The projection was erroneous by a full 2,440%–far beyond any mistake government economists anticipated in the 1960s. Why such incredible myopia? The accumulated wisdom of economists and tax policy experts show that legislative moves to increase entitlements are the key problem. As the Congressional Budget Office noted in its “Historical Budget Data” report, entitlements in 1962 accounted for only 32% of government spending. But today, entitlements make up nearly 60% of all outlays.

“Government cannot control how much is spent,” say economists Brian M. Riedl and William W. Beach of the Thomas A. Roe Institute for Economic Policy and Studies and the Heritage Foundation. That’s because lawmakers’ prerogatives are limited. They can only set eligibility requirements and benefit levels, not actual dollar amounts. This “leav[es] the program’s cost [to be] determined by however many eligible individuals enroll in the program,” the economists say.

According to the Riedl and Beach, Medicare alone will cause the current budget deficit of $455 billion to increase to $5 trillion by 2030. By 2025, Medicare will account for 3% of GDP. That’s $325 billion measured against the country’s current economic output. This seems likely to cripple any efforts to extend tax cuts–now, and indefinitely into the future. Take Clinton adviser James Carville on point, whose vehemence on tax cuts points up how determined Democrats are to torpedo them. Calling Bush’s tax policy an “idiotic and stupid tax cut for the rich,” Carville asks rhetorically, “Remember when this country used to run a surplus? I do, three years ago.”–a sentiment that is shared by Democrats and routinely sets them afire in their opposition.

New York Times columnist Paul Krugman accuses the Bush administration of fudging deficit numbers to push through tax cuts. Recently he wrote, “Realistic budget numbers would have undermined the case for tax cuts. So budget analysts were pressured to high-ball estimates of future revenues and low-ball estimates of future expenditures.”

Krugman has a point, though, which Democrats will ride politically, spelling trouble for the Republican Party. If the budget deficit continues to grow at record levels, it will be extremely difficult for Republicans to pass tax cuts. President Bush’s persistence to add a prescription drug plan to Medicare will only exacerbate the deficit and add fuel to the Democrats’ relentless attacks on Republicans’ being fiscally irresponsible. Like clockwork, Democrats have religiously attacked President Bush’s 2001 and 2003 tax cut, and it is naïve to think that these attacks will mollify in the future with rising deficit spending on social programs.

Since President Bush signed into law the third largest tax cut in American history–reducing the capital gains tax by 25% and reducing dividend taxes by 68%–at least 175 companies have increased dividend payments or have issued dividends for the very first time. According to the American Shareholders Association, dividend payments increased by 30% above 2002 levels.

Nonetheless, Democrats in cultic consonance will blame the vast deficits as a result of slashing tax rates; the economic growth spurred by Bush’s tax cuts will be overshadowed, just as Reagan’s successful tax cuts have fallen victim to historical revisionism. Even though Reagan’s tax cuts resulted in the federal government collecting more money than any other previous administration in history had done, Democrats pin those deficit years–simply resulting from too much spending–on tax cuts.

Over the next 30 years, the number of Medicare beneficiaries will rise from 40 million to 80 million. Bush’s new prescription drug legislation would only compound Medicare’s economic woes. Riedl and Beach believe that the Medicare and prescription drug shortfall will be $525 billion by 2030.

It’s a fair bet that, thirty years hence, politicians will refuse to defund the program at that time. They will resist higher premiums for seniors to cover costs, and will instead force taxpayers to pick up the tab. At present, part of the 7.65% payroll tax is supposed to fund Medicare. But the federal government would need to increase the payroll tax by at least 100% to pay for this prescription drug program.

Put in different terms, a baby born today inherits a Medicare debt of $2,855. This new prescription drug plan adds another $1,125, bringing the total burden we would place on newborn Americans to almost $4,000. President Bush is thereby setting the stage to make it difficult for the next Republican President to campaign on a tax cuts platform or even push tax cuts through Congress.

In a similar vein, the General Accounting Office released a study that states the current social security program if left alone will result in “persistent, escalating federal deficits, significant tax increases, and/or dramatic budget cuts of unprecedented magnitude.” Brad Smith, a 20-yearold junior at Harvard University, testified before the U.S. Senate Special Committee on Aging beseeching the Congress to remedy future Social Security shortfalls. Smith said that his generation will only be able to “receive 75% of the benefits retirees today receive.” To reiterate the point, newborns entering the world today are given a $4,000 gift of debt, and today’s young adults will not be reaping the social security benefits they are currently sowing in taxes–a travesty that will escalate further with the increasing number of seniors.

Democrats have already shown their cards in the 2000 and 2002 elections; political class warfare should be expected, which means Republicans should not be passing legislation that will produce massive deficits that will aid liberal anti-tax-cut talking points.

Indeed, the likely liberal talking points for 2008 and 2010, when occasion arises to reconsider respectively the 15% tax rate on dividends and capital gains and the bulk comes up of the 2001 tax cuts, are that continuing tax cuts will cost billions–billions that should be directed toward the very unfunded mandates that Bush’s Medicare and prescription drug bill is poised to create.

Allowing the 2001 and 2003 tax cuts to expire will hit taxpayers with a $775 billion tax increase, according to the Office of Management and Budget. At that point, further tax cuts would seem extremely unlikely, and goals like the flat tax or a national sales tax system would be reduced to pipe dreams of a bygone era.

As Americans for Tax Reform president Grover Norquist commented July 11 on National Review Online, the day of year by which the average American finishes paying his share of government’s cost has crept increasingly later year-by-year–from July 6, 2002, to July 11, 2003. That date “falls five days later in 2003 than it did in 2002, and it is now at its highest level since 1993,” wrote Norquist. With Bush championing a $170 billion Farm bill, $26.5 billion Education bill, and now a $400 billion prescription drug bill, the “cost of government day” will surely creep later into the year, the deficits will be sure to soar, and the lifeblood of the Republican party–tax cuts–may be poisoned for years to come.

Jason Mattera, a junior at Roger Williams University, is a National Journalism Center intern this summer.