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| Decision 2004 |
Paying for Lunch
Michael Sisk
09/01/2004
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Alan Greenspan, in the grips of an unusual bout of verbal clarity, recently
fell back on the most hoary cliché in economics to sum up the roots of our
government’s budgetary quandary: “There is no free lunch.” President Bush’s
administration has laid out a feast of tax reductions (of which Greenspan is an
ardent admirer), but it has not paid for it with offsetting spending cuts, the
often-enigmatic Fed chief warned.
 We have heard this concern before; similar
worries accompanied the Reagan administration’s pairing of tax cuts and spending
increases in the 1980s. However, unlike budget deficits in years gone by, the
sea of red ink in which we now swim, Greenspan and others argue, is a secular
phenomenon, not a cyclical one.
In a speech in May, Greenspan warned, “Our
fiscal prospects are, in my judgment, a significant obstacle to long-term
stability, because the budget deficit is not readily subject to correction by
market forces that stabilize other imbalances.”
The economists among us
rarely worry about cyclical deficits—they resolve themselves, for the most part,
as the economy grows and throws off more tax revenues, as happened in the 1990s.
However, a secular deficit is a more rare and troubling breed, more often seen
in crisis-racked third-world nations than in economic powerhouses. It does not
wax and wane as the economy moves through its cycles; it is not amenable to a
natural resolution. It needs to be fed with new revenues, or tamed with painful
budget cuts.
TOP VIEW
Economists say the United States is in the grips of an unusual,
secular budget deficit caused by a combination of higher government spending and
lower tax revenues. The costs of entitlement programs, homeland security and the
war in Iraq have deepened the deficit. The odds of a tax increase to close this
gap are better under a Kerry administration than they are under a second Bush
administration, but opposition in Congress may stall efforts to balance the books by either candidate. Despite this, most believe that the deficit will
eventually require taxes to rise. |
Spending watchdogs at the Congressional Budget Office (CBO) now
believe the aggregate deficit will grow from approximately $500 billion this
year to nearly $3 trillion in 2011. Budgetary forecasts that far into the future
are seldom correct, but in this case, some fear the CBO is underestimating the
problem. The ISI Group, a New York and Washington, D.C.-based financial services
firm, estimates that keeping the Bush administration’s 2001 and 2003 tax cuts in
place for 10 years will alone cost the government $3 trillion in forgone
revenues.
The tax cuts enacted in 2001 and 2003 (see “Sunset Schedule,” at the end)—affecting income, dividend, capital gains and estate taxes—suddenly look
vulnerable. This is especially so of the capital gains tax, now at a historic
low, and the estate tax, slated to wink out of existence at the end of this
decade. “No one I know of actually believes the estate tax will go to zero in
2010,” says Don R. Weigandt, managing director at JP Morgan Private Bank in Los
Angeles. “A few people within the Beltway think it won’t be repealed, but they
live in a parallel universe.” The administration premised its tax reduction
initiatives on a budget surplus the government expected to run well into the
next decade, which has proven chimeral. “Before the ink was dry on the [estate
tax reduction], the federal budget surplus that was supposedly funding it had
dried up,” Weigandt points out.
“Weak-kneed members of Congress may well roll
back tax cuts to reduce the deficit,” says Scott Hodge, president of the Tax
Foundation, a nonpartisan tax research group founded in 1937 and based in
Washington, D.C. “Members of Congress are more comfortable raising taxes than
cutting spending. The solution is always to raise taxes, not cut
entitlements.”
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