This week, President Bush signed the “Jobs and Growth Tax Relief Reconciliation Act of 1993,” a $350 billion tax cut. With across-the-board reductions in marginal rates, reduction of the marriage penalty, and reduction of the tax on capital, Americans should see real differences in their tax bill. Although, the tax bill was smaller than the president originally proposed, it does offer some relief. In fact, the Treasury Department estimates that taxpayers should see savings of $109 billion in 2003. Yet the tax cut has drawn fire from both the left and right. The left decry the tax cut as an unaffordable deficit buster, while some on the right see the tax cut as too little to have meaningful economic impact.
If viewed as an end in itself, the tax bill that Congress passed is modest at best, with sunset provisions on the tax cuts and more federal spending. All but one of the tax cut provisions expires by the year 2008. The Senate balked when it came to offering a larger tax package and could not resist the opportunity to provide a $20 billion bailout for state governments that have spent their way into the red. With the Congressional Budget Office forecasting federal revenues to be $28 trillion over the next ten years, and the tax cut to be $320 billion over the same period, the tax cut is small indeed—just over 1 percent of total revenue collection.
However, from a broader perspective, the tax cut should be seen as a step towards fundamental tax reform. The president’s plan was more sweeping, but the final tax package paves the way not only for creating a simpler, fairer tax code, but also implementing important measures beyond the tax code. While spending has not played a prominent role in the debate to date, it will become more important in future debates. President Bush has challenged Congress to hold the line on discretionary spending. At the same time, the president has stressed the need to reform Social Security and Medicare, two of the largest entitlement programs. The Jobs and Growth bill is an important start for implementing the president’s broader agenda of lower taxes and smaller government.
To begin with, the tax bill changes the dynamic for future tax debates. Clearly, Republicans will introduce legislation to extend the provisions as they sunset. Opposing these bills will be more difficult, because the results will turn up in the paychecks of taxpayers. Failing to extend the tax cuts has a high political price. Estimates suggest that if the tax cut provisions are extended over the next ten years, the true size of the tax cut is closer to $800 billion.
More importantly, the tax bill will frame coming debates about the size and scope of government. Tax cuts are a restraint on the growth of government that leave resources in the private sector to be saved, invested, or consumed. However, tax cuts must be accompanied by spending cuts to rein in government. If spending persists, Congress is simply trading off the current tax cuts for future tax hikes. In the wake of the tax cuts, Congress must now review its budgetary priorities and establish a greater degree of fiscal prudence.
The administration’s budget limits the growth of federal spending, but it does not stop it. The president sought to cap growth at 4 percent. Unfortunately, this locks into place the spending surge of the last five years (comparable only to World War II spending levels) that ramps up 4 percent annually. Both Congress and the president must address the issue of spending directly to bring it in line with the revenue levels set out in the Jobs and Growth Act.
Mandatory expenditures on programs such as Medicare and Social Security are on an unsustainable path, driven, in large part, by demographic trends and the retirement of the Baby Boomers. As noted in the president’s budget, Medicare and Social Security are facing a combined liability of $18 trillion. Social Security will continue to collect more than it pays out through the year 2018, after which, it will need to draw down revenues from the federal government. Medicare is already in the red, requiring funding from general revenues to stay afloat. President Bush has called for fundamental reforms of both these programs to return them to firmer financial footing, while providing a more secure future for retirees.
The forecast for discretionary spending is not much better. According to the Congressional Budget Office, discretionary spending is $805 billion for 2003 and is expected to grow to over $1 trillion dollars by 2013—a 30 percent increase. Before the deficit hawks criticize the tax cut, they should examine the federal budget and ensure that every dollar collected in revenue is put to a valuable use and there is no waste or fat to trim from the budget.
In fact, the government loses almost as much on erroneous payments in Medicare, Food Stamps, and other assistance programs as taxpayers would gain from the current tax cut. The GAO estimated $20 billion in erroneous payments in each of the three last years; but the Office of Management and Budget claims the rate is even higher, up to $33 billion. Simply rooting out such problems over the next ten years would cover any revenues lost from the tax cut.
Overall, the Jobs and Growth Act provides some tax relief for Americans that should provide benefits to the economy as a whole. More importantly, the tax cut sets the tenor for future tax and budget battles and spurs the need for fiscal discipline. Federal spending needs to be curbed and outdated entitlement programs, including Social Security and Medicare, are in dire need of reform. Deficit politics were used against the tax cuts, cutting the president’s initial proposal by more than half. Will Congress apply those same arguments to spending as well?