Tax cuts could be reversed before they even kick in

Most cuts won't take effect until 2005 or later - when government may need extra cash for big-ticket expenses.

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Final passage of the biggest tax cut in a generation is a triumph for President George W. Bush - and could well establish fiscal limits that determine what the government can and cannot do for years to come.

One caveat: It's legislation that might eventually be revisited. Although most taxpayers will receive checks for $300 this fall ($600 for couples), many major provisions don't take full effect until 2005 or later, leaving lots of time for further tinkering. Newly empowered Senate Democrats may already be laying plans to do just that.

But unless essentially reversed, the legislation will reallocate so much of the projected surplus that significantly less money will be available for expensive new spending initiatives, be they national missile defense or a prescription-drug benefit.

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"If government wants to continue with a balanced budget, then the tax cut is definitely going to constrain its actions over the next decade," says Bill Gale, a fiscal policy expert at the Brookings Institution in Washington.

Mr. Bush's focus and political salesmanship are big reasons why the legislation passed at all. As recently as last January, Washington's conventional wisdom held that the Bush tax plan was doomed - a victim of the close election and voter ambivalence.

Then Bush's timing proved right. Surplus projections boomed, and Fed chief Alan Greenspan endorsed rate reductions as a preferable way to use the coming windfall. At the same time, the economy sputtered, and the administration switched to selling tax cuts as tonic for the ailing economy, for rising gas prices, for just about everything except unrest in the Middle East.

The result was a legislative victory bigger than some presidents ever win in their entire terms.

In some ways, the result was a return to the 1980s and the first days of the Reagan Revolution. President Reagan saw taxes as the only way to control the size of government. To the GOP, it is an article of faith that rate reductions are the only way to keep government's role in society from getting bigger.

When it comes to the surplus, "If we don't cut taxes [Congress] will spend every doggone dime," said Sen. Orrin Hatch (R) of Utah after passage of the tax bill last weekend.

Doing the math

Just look at the numbers. First, set aside money that both parties have pledged to use to maintain Social Security and Medicare. Next add the cost of the Bush tax plan - at least $1.35 trillion - to the $400 million or so in extra interest payments the government will have to make on debt that would otherwise have been retired.

The result: The Bush tax plan will use almost two-thirds of the noncommitted surplus cash available over the next decade. At the same time, baby boomers will begin retiring in large numbers, straining Social Security and other federal entitlement programs.

The tax cut "takes a lot of resources off the table that may well be needed, particularly for Social Security reform, and perhaps for Medicare reform," says Robert Bixby, head of the Concord Coalition, a fiscal watchdog group in Washington.

There's still $1 trillion or so of the projected surpluses left unaccounted for. That's far from a trivial sum, even by Washington standards.

But the list of potential claimants for that cash is long, and growing. At the Pentagon, missile defense alone could cause budgets to skyrocket. A prescription-drug benefit for Medicare is likely to cost much more than Bush budget plans take into account, particularly now that Senate Democrats are in position to make any such program more generous.

From their Senate base, Democrats will push increased education and anti-poverty spending, while Bush will call for partly privatizing Social Security, which could entail large transition costs.

The problem, says Mr. Bixby, is not so much that the tax cut will preclude any of this from happening. It is that it may not.

"The greater danger is that they will do the tax cut and also do the spending they are talking about," he says. "Both will end up costing more than they anticipate, and we could end up with deficits again."

Not big enough?

Some conservatives, on the other hand, believe the tax cuts are not large enough. While they might keep the federal government from getting bigger, they will not actually make it smaller.

When it comes to spending, the reductions "have more of a defensive impact, meaning something bad is not going to happen in the future," says Daniel Mitchell, a fiscal expert at the Heritage Foundation in Washington. Reagan aimed to get rid of whole cabinet departments, while the Bush plan foresees government spending continuing to grow at between 4 percent to 6 percent a year.

"The fact that [the tax cut] might make government smaller 30 years from now is almost an afterthought," says Dr. Mitchell. "That is a substantial difference from Reagan to Bush."

(c) Copyright 2001. The Christian Science Monitor

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