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| Decision 2004 |
Paying for Lunch
Michael Sisk
09/01/2004
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Staggering Shortfalls
Economists and politicians always debate the wisdom
of tax increases or cuts. However, there is an unusual consensus growing over
the scope and nature of the current deficit. Most will agree that it is
alarmingly large; larger certainly than it would appear based on the White House
budget, which omits the costs of the war in Iraq. There is also broad concern
that it will get much bigger if tax rates remain the same and the entitlement
programs (especially Social Security and Medicare) are not reformed before the
country’s 77 million baby boomers start retiring in the next decade. Also, most
observers agree that it is impossible for the country to grow fast enough to
generate adequate revenues to balance the budget.
“With the economy and the size of the deficit, we view a tax hike as highly probable. We have a structural deficit: In other words, it needs more revenue;
it is not going to fix itself, no matter how the economy performs. Given that,
there is a certain air of inevitability to higher taxes. The capital gains tax
is lower than it has ever been, and I am fairly certain that’s going to be one
of the first places that they turn to increase revenues.”
—Bill Baldwin, president, Pillar Financial Advisors |
In 2001, when lawmakers
were contemplating the Bush administration’s tax cuts, government accountants
forecasted that there would be a $5.6 trillion surplus in 2011. Today, they
expect a $2.9 trillion shortfall. Explanations for this volte-face abound.
According to the Washington, D.C.-based, nonpartisan Center on Budget &
Policy Priorities, about 40 percent of the difference in the two estimates is
attributable to technical adjustments. In other words, the original revenue
models were simply wrong. The other 60 percent of the change in the deficit
forecast is attributable to policy changes. About half of that is due to tax
cuts; the balance is due to increased spending. Most of that spending came in
the form of defense, homeland security and entitlements. Less than 2 percent of
the forecast deficit is attributable to increased domestic spending outside
these programs.
Entitlement programs are particularly troublesome, since they
are difficult to modify. A chunk of the deficit is due to the passage of the
prescription drug plan for Medicare, an expensive addition to an already
underfunded entitlement. A report released in June by the National Center for
Policy Analysis says, that in 10 years, one out of every seven income tax
dollars will be needed to fund Social Security and Medicare; in 15 years they
will absorb one out of every four dollars.
 | | SOURCE: CONGRESSIONAL Budget Office projections, January 2004. (Click image to enlarge) |
“The implicit debt for Social
Security and Medicare—the numbers are just staggering,” says Joel Slemrod,
director of the Office of Tax Policy Research at the University of Michigan
business school in Ann Arbor. “I think it’s widely agreed by experts on both
sides that the combination of entitlements and tax breaks is not
sustainable.”
Presidential Positions
Although neither presidential candidate is a
deficit hawk, each would undoubtedly take a different approach to the problem.
Bush has worked long and hard to make his position clear: no tax increases,
period.
| “A few people within the Beltway think [the estate tax cut] won’t be
repealed, but they live in a parallel universe.” |
His budget proposals for fiscal years 2005 to 2009 include
provisions for making almost all of the recently passed tax cuts permanent. He
wants to reduce the budget deficit by 50 percent by 2009, and to reach this
goal, he proposes holding growth in real per capita discretionary
spending—outside of defense, homeland security and international affairs—to 15
percent below the rate of inflation.
In the first two years after the
election, “I don’t see a rollback in any taxes unless there’s a change in the
White House,” says the Tax Foundation’s Hodge. “Bush has staked so much
political capital on the tax cuts; I think there’s a pretty good chance that he
would make them permanent. He’d likely come in with political capital and strong
momentum and could well make cuts permanent.”
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