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New Era Means Trimming Tax Cut

January 14, 2002|RONALD BROWNSTEIN

The Bush administration and its allies have settled on their best line of defense against escalating Democratic charges that the president's tax cut squandered the massive budget surplus and plunged the government back into deficit. The problem, they're arguing, isn't the tax cut, it's that everything else has changed.

Which is exactly the best argument for changing the tax cut.

Although he's slighting the impact of the tax cut, President Bush has every right to pin much of the blame for the near-term deficits on recession and the cost of responding to Sept. 11. When Bush took office, the Congressional Budget Office projected a cumulative surplus over his first term of $1.35 trillion. Now, his administration is expecting deficits every year through 2004 and probably 2005, before projected surpluses return. Over that period, the tax cut Bush pushed through Congress last spring is expected to cost $344 billion. So Bush is right that the tax cut alone can't be responsible for what Senate Majority Leader Tom Daschle (D-S.D.) this month termed "the most dramatic fiscal deterioration in our nation's history."

But by underscoring the enormous impact of recession and the war, Bush inadvertently undermines his case for staying the course on the tax cut. In effect, the president is arguing that because everything has changed since Congress approved the tax cut last spring, we should continue to cut taxes as if nothing had happened.

One of the principal arguments Bush made for his tax cut was that if Congress didn't return the vast projected surpluses to the taxpayers, government would spend them. Now, as he's acknowledging, recession means federal revenue will be much smaller, even as the government must fund critical defense and homeland security upgrades. The latest congressional estimates are that the government budget surpluses over the next decade may be only one-third as large as those projected when Bush signed the tax cut. And almost all of that shrunken surplus will come from taxes earmarked for Social Security, which is in the black only until baby boomers begin retiring in large numbers. Bush doesn't have to worry anymore about big government getting its hands on the surplus: There's no surplus to grab.

Until Sept. 11, both parties had agreed to reserve the Social Security surplus mostly to pay down the national debt. But the budget has deteriorated so fast that it now appears Washington will be forced to use Social Security money to pay for other government programs and the tax cut through at least 2008. That diversion condemns future taxpayers to a larger federal debt, higher interest costs to service that debt and higher taxes to pay that interest.

Which means that by using Social Security money to fund the tax cuts, we are raising taxes on our children to reduce them on ourselves. Compounding the problem, for at least the next few years the federal government is expected to consume all of its general revenue, all of the money raised for Social Security and still be forced to increase the national debt to pay for its operations--all while reducing taxes. These are hardly scenarios that fit the American ideal of sacrificing for the next generation.

Indeed, there's no real precedent in U.S. history for cutting taxes at the start of a war. However reluctantly, Americans have always accepted higher taxes as the price those at home pay to support those under fire. The first income tax was imposed to pay for the Civil War; in World War I and World War II, income tax rates were raised to unprecedented heights. During Vietnam, Americans shouldered a 10% income tax surcharge.

Today, no one in either party is talking about tax increases. The only question is whether the country can still afford further installments of the Bush tax cut scheduled mostly for 2004 and 2006, particularly those that will benefit the top earners. Those further reductions--which will bring down the top income tax rate paid by the highest earners from 38.6% today to 35% by 2006--are a central reason why the tax cut is projected to cost almost twice as much from 2006 through 2008 as it does from 2002 through 2004.

That rising bill for the tax plan will arrive even as the government faces enormous demands for defense and homeland security unimagined when the cuts were approved. Pentagon officials have recently disclosed that they will seek a $20-billion budget increase next year. Homeland Security Director Thomas J. Ridge has signaled he may seek as much as $35 billion to fortify America's internal defenses.

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