From the right wing "The Economist"
economist.com
The latest Bush tax cut: Disingenuous and risky
May 29th 2003
From The Economist print edition
There is nothing wrong with tax cuts or tax reform; but don't muddle them up
IT IS hard to object to tax cuts—particularly when you are about to receive one. However, even the most conservative American should pause to reconsider the “economic recovery bill” concocted by Congress and George Bush that will hand back some $350 billion over the next decade. Sadly, this giveaway is disingenuous and also something of a gamble.
The first sleight of hand is that $350 billion number. Mr Bush had hoped for twice as much, but Congress has squeezed his tax cuts into a smaller package by setting time limits. For instance, the cuts in dividend taxes and capital gains are due to expire in 2008. At face value, this presents an absurd series of incentives for taxpayers. In fact, the chances of politicians letting the taxes reappear are slim. Add in a little political reality and the true cost of the tax cut could be $800 billion.
Now consider the next sleight of hand. Mr Bush has muddled up two sensible ideas: the short-term need for a fiscal stimulus to pep up the faltering American economy; and a long-term fiscal reform—namely shifting the tax burden away from investment. Mr Bush has got rid of inheritance tax, at least temporarily. This time his big target was dividend income, which is taxed twice—as corporate profits and as personal income. He wanted to eliminate the latter; Congress has opted to cut the rates roughly in half.
By trying to smuggle in dividend-tax reform as the best way to give the economy an immediate jolt, Mr Bush has improved neither the stimulus nor the long-term fiscal position. There has been fanciful talk from the White House about lower investment taxes delivering an immediate confidence-inspiring boost to the stockmarket (which, incidentally, has not happened). But nobody trying to jumpstart the economy would begin with dividend taxes. True, some of the other measures in the tax cut, such as increasing the child tax credit, may have a more stimulative effect. But Mr Bush looks set to go into the next election having overseen at least 1m net job losses.
The longer-term danger is greater. By equating tax reform with a short-term giveaway, Mr Bush has made his overhaul of the tax system hopelessly one-sided: it is all tax cuts, with no countervailing reforms on the other side of the ledger, such as reorganising Social Security, Medicaid and Medicare. The main long-term fiscal challenge is restructuring these “entitlement” programmes to cope with the demands of the retiring generation of baby-boomers by the end of this decade.
Less pork, more beef
This is where the gamble comes in. Mr Bush's budget deficit is excusable for the moment: the war on terror has been expensive, and it makes no sense to run a surplus in a downturn. But the deficit is rising: even before this tax cut, the official forecast was for $1.8 trillion over the next decade (see chart). And he has still done nothing about entitlements. Rather than reforming the health-care system, Congress seems set to add to the number of free pills old people can get. “Social-Security reform” has so far been merely a slogan.
In the 1980s, Ronald Reagan also cut taxes (from far more draconian levels) and failed to cut spending: the result was an entrepreneurial boom, but also huge deficits, which were reduced only when Mr Bush's own father raised taxes. Bush the younger is heading down the Reagan road, with the additional huge problem of those retiring baby-boomers. Unless he changes tack, he could leave a terrible mess behind him. |
