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Recently, Congress passed the “Jobs and Growth Tax Relief Reconciliation Act of 2003,” a tax cut that addresses a number of flaws in the current tax code. Importantly, the tax bill focused on incentives, with across-the-board tax cuts, reductions in the cost of capital, and changes in depreciation that would foster investment by small business. In addition, it sought to remove punitive elements of the code, such as double taxation and the marriage penalty. The bill that finally passed was less than half of what President Bush initially proposed. Using the deficit for leverage, the Senate capped the tax cut. Interestingly, they also added $20 billion in new spending to bail out debt-ridden states, which raises questions about whether they were concerned about the deficit or what was left for them to spend.
While the vote for the tax cut came down to the wire, with Vice President Cheney called in to break the tie, new spending measures are moving through Congress with substantial majorities. Caving to media pressure, the Senate voted 93-0 to extend the child tax credit to those who were not paying taxes in the first place, at a price of $10 billion. More ominously, bipartisan support is growing for a new $400 billion prescription drug benefit—a price tag higher than the tax cut—that does nothing to address the underlying institutional failures of the Medicare program. With an unfunded liability of $13 trillion, Medicare needs fundamental reform, not lavish new benefits heaped upon a failing program. There is also talk of a new supplemental spending bill, boosting spending even further this fiscal year.
Despite the rhetoric of concern over tax cuts, the reality is far different. Spending continues to rise in Washington, and concerns over deficit spending are more appropriately targeted at runaway spending programs. Balancing the budget or generating a surplus did little to promote fiscal discipline. In fact, federal spending during the surplus years was brisk. As Brian Riedel of the Heritage Foundation notes, “Despite reports of heartless budget cutting, the past few Republican Congresses have distinguished themselves by outspending their predecessors. Federal spending has increased by an astounding $586 billion ($404 billion after inflation) since 1998.” Congress has done little to promote fiscal responsibility and long-term economic growth.
President Bush recognized this and proposed a broader economic growth package. As the president and his advisers made clear, the plan was not a stimulus package; rather, it was a package to put the country on a better trajectory for growth. This means strengthening the market’s underlying institutions while providing greater incentives to save and invest. To do this, the president offered a comprehensive economic package, that included important tax reforms and lower marginal rates as well as new ways to save, and important changes to allow more investment by small businesses. President Bush also raised concerns about the future of Medicare and Social Security, both of which continue to be multi-trillion dollar liabilities, while raising concerns about excessive government spending.
In the end, the president was able to move forward with significant reforms, but the final package is smaller and more complicated than the original proposal. Taxes were cut, but in order to navigate the rules of the Senate, sunsets were included, which ensure that the tax battles will continue for the foreseeable future. Despite the fact that the tax bill was cut in half, the tax cuts have still drawn criticism from those favoring big government. A common criticism is that there is simply a tax shift, with federal taxes falling while states raise taxes to cover budgetary shortfalls from years of excessive spending. This argument is misleading at best. First, the crisis in state spending is a clear example of the dangers of excessive government spending, with states that spent freely as revenues increased now finding themselves exposed during the slow economy. A more appropriate solution is to curb state spending, and some states are proposing plans to limit spending based on the rate of inflation and population growth, a solution that establishes institutional safeguards against overextending government.
Second, the states must address their budgetary problems regardless of federal tax policy. The alternative would be to leave more tax dollars in Washington while potentially paying higher taxes at the state level. It is highly unlikely that, absent a tax cut, the federal government would have provided states assistance while cutting spending elsewhere to keep overall spending constant. The solution is simple, government spending must be restrained at all levels of government—federal and sate included.
A far more concerning tax shift is the potential transfer of the tax burden to future generations. Ultimately, the debate over the tax cut is a debate over the size of government. President Bush proposed tax cuts in order to strengthen the private sector while reducing the role of government. But cutting taxes is only half the battle. Congress must also curb its appetite for spending. Otherwise, the bill for today’s spending will fall on tomorrow’s taxpayers.
Since his inauguration, President Bush has pursued an agenda of tax cuts, and there is no indication that this will change in the future. The president has made clear his intention to cut taxes and provide taxpayers better incentives to work more, save more, and invest more. But spending remains a problem, especially with the mounting liabilities of Social Security and Medicare. Rising deficits may provide Congress a sorely needed wake-up call, but to date, Congress has offered little more than lip service to the notion of reduced spending. The president has been successful in his efforts to reduce taxes. Now, he must also turn his attention to the spending problem and the need to reform the faltering Social Security and Medicare programs.