Tax Experts Doubt Surplus Numbers, Warn Bush On Tax Cuts
By Damian Milverton
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Will George W. Bush's proposed tax cuts do more harm
than good? Will the surpluses his economic agenda depends upon actually
materialize?
Has Alan Greenspan stolen the march on the president-elect with a sudden
shift to an easier monetary policy stance that might revive an unsteady U.S.
economy well before the first Bush tax cut enters the legislative labyrinth?
Three budget policy specialists gathered at the National Press Club Thursday
to offer their own answers, essentially criticizing Bush's tax cut strategy
as too risky and agreeing with Federal Reserve Governor Laurence Meyer that
economic stabilization is best handled by those in charge of monetary
policy.
Indeed, this panel found favor with few elements of the Bush tax plan: They
questioned growth projections underlying the budget surplus figures;
expressed skepticism over spending assumptions; argued that Social Security
and Medicare will need extra support; and noted that most of the promised
Bush tax relief would be delivered in the last five years of the projected
10-year horizon - far too late to help the U.S. economy in 2001.
The panel was headed by Robert Greenstein, executive director of the
nonpartisan Center of Budget and Policy Priorities and included Brookings
Institution tax scholar William Gale and Robert Bixby, head of the
nonpartisan Concord Coalition, which seeks to educate the public on budget
issues.
All three put little faith in the current projections of budget surpluses in
the trillions of dollars over the next 10 years, and they were as one in
rejecting the theory that massive tax cuts can deliver a life-giving jolt to
an imperiled economy.
Rosy Forecasts, Huge Tax Cuts - The Perfect Storm?
Bixby went so far as to warn of "a perfect storm" that could arise in the
years ahead from a "convergence" of inaccurate budget forecasting,
overaggressive tax cuts and new spending.
He and the panel sided with Treasury Secretary Lawrence Summers in arguing
that the kind of tax cuts proffered by the Bush team could in fact lead to
higher long-term interest rates if the outlook for surpluses turns gloomy
and the government is again forced to rely on markets to cover its budget
deficits.
Much of the opposition to the Bush tax plan stems from the process of
forecasting the budget surpluses that are expected to pay for this strategy.
The White House last week estimated budget surpluses will total $2.4
trillion over 10 years to 2011. The Congressional Budget Office is expected
to issue its own estimate in the weeks ahead that could be anywhere between
$2.5 trillion-$3.0 trillion, Greenstein said.
However, he noted that the CBO estimates assume an end to certain tax breaks
that Congress likely will seek to preserve, and include temporary surpluses
in the Medicare Hospital Insurance trust fund that Congress has pledged to
set aside and protect for the future.
Additionally, projections so far have assumed that growth in discretionary
spending - on pet political projects such as defense - won't exceed either
inflation or the rate of population growth.
Bush Tax Cut Cost Put At $2.1 Bln Over 10 Yrs
This would assume an actual real contraction in discretionary spending,
something Greenstein found unrealistic given Gale's expectation that the
surplus will inevitably be used to "grease the wheels" for political deals
in a narrowly divided Congress.
These elements alone, Greenstein argued, trim the 10-year budget surplus
forecast to $1.5 trillion-$2.0 trillion. But he argued the government will
face pressure to set aside as much as $500 billion over this period to
protect the solvency of the Social Security trust fund.
Even so, a revised surplus estimate along these lines might still afford
Bush the opportunity to make good on his promised $1.3 trillion tax cut
plan.
Perhaps not. Even Bush's own team acknowledge that the likely cost of the
fiscal package is closer to $1.6 trillion, when viewed over the same 10-year
period ending 2011 that the CBO prefers when building its surplus estimates.
Greenstein argued that even this figure is likely $500 billion too low. He
expects the Bush administration will adjust the alternative minimum tax
(AMT) on high-income earners to ensure it doesn't penalize a middle-income
earners climbing the tax scale, likely costing around $200 billion out to
2011.
Finally, because Bush favors tax cuts over debt reduction, his government
will face around $400 billion in additional interest charges, Greenstein
estimated. After adding $100 billion to take out some double-counting in
this analysis, he put the total cost of the Bush tax cut at $2.1 trillion -
outside the $1.5 trillion-$2.0 trillion surplus Greenstein expects.
Tax Cut Seen Offering Scant Short-Term Boost
Gale also dismissed the Bush argument that tax cuts will help the economy
recover from its current slowdown by noting that tax relief proposed for the
first three years of Bush's program would equal only around 0.3% of gross
domestic product, hardly a massive boost for a $9 trillion economy.
Once the panel members had concluded their analysis, however, there was
acknowledgment that - regardless of their efforts - the U.S. is headed for a
tax cut, and it remains to be seen whether economic conditions or political
considerations do anything to lead Bush to tinker with his campaign pledge.
-By Damian Milverton, Dow Jones Newswires; 202-862-9272;
damian.milverton@dowjones.com
(END) DOW JONES NEWS 01-04-01
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