Posted on 02/17/2003 4:09:27 PM PST by Forgiven_Sinner
| WASHINGTON, DC
George Bush's radical new budget would make Ronald Reagan smile
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FOR the past two decades, Ronald Reagan's budgets have set the standard for radicalism in American fiscal policy. Conservatives eulogise the Gipper's tax cuts; Democrats decry the deficits that exploded on his watch. If the budget that George Bush unveiled on February 3rd is enacted in anything like its current form, it will match Mr Reagan's efforts for boldness. With little fanfare (since it was overshadowed by both Columbia and Colin Powell), Mr Bush's third budget proposes a radical reform of America's tax code and a dramatic reorganisation of how social services are provided; if enacted, it would also add to the prospect of long-term budget deficits.
Tax cuts are the centrepiece of this budget. Unlike the Gipper, who clawed back some of his landmark 1981 tax cuts in subsequent years as deficits ballooned, Mr Bush wants another round of tax cuts worth $1.3 trillion over the next ten years. As he promised last month, he wants to make permanent the 2001 tax cuts, which currently expire at the end of 2010. He also wants to accelerate the income-tax cuts, child tax credits and other reductions that appear gradually over the decade. And, most controversially, he wants to end the double taxation of dividends. But the budget does not stop there.
The Bush team wants to overhaul the savings industry, replacing the current mosaic of tax-sheltered schemes with three simple accounts—two for individual savers and one for plans sponsored by employers. Any American resident, regardless of age or income, could put up to $7,500 a year in a “Lifetime Savings Account” (LSA), from which tax-free withdrawals could be made at any time. A further $7,500 could go into a “Retirement Savings Account” (RSA), where all withdrawals would be tax-free for anyone over the age of 58. The plethora of job-based retirement plans would be simplified and consolidated.
Mr Bush says this is just revamping the current system. In fact, it is much more ambitious. By greatly increasing the amount of money that can be put into tax-sheltered accounts, and by lifting all income limits on who can use them, his team would sharply reduce the taxation on saving. Together with the elimination of dividend taxation, these proposals would ensure that most Americans would no longer pay any tax on their savings. America's personal income tax would, in effect, become a wage tax, and the country would have taken a huge step towards a consumption-based tax system.
The goals of such a shift—higher saving and thus stronger economic growth—are laudable. But unlike the many plans that radical tax reformers have touted in recent years—and unlike Mr Reagan's 1986 tax-reform package—Mr Bush's proposals make no effort to be revenue-neutral. In the short term, the new savings vehicles would actually add to the government's coffers as Americans convert their savings from existing schemes (on which tax has not been paid) to the new accounts. But since all withdrawals from the new accounts will be tax-free, the long-term effect will be less money for the government.
The budget contains few proposals to claw back money elsewhere, even though some such measures would be sensible tax reforms in their own right. Tax deductions for, say, mortgage interest or charitable donations have not been reduced or eliminated; rather, they have been expanded and joined by new deductions.
Mr Bush's fiscal conservativism, as far as it goes, is reserved for the spending side of the budget. At first sight, this offers no big surprises: a modest 4% increase in overall discretionary spending (that is, spending outside Medicare and Social Security) and a shift in priorities towards security. Most of the increase goes to the Pentagon, which gets $380 billion in all. Mr Bush has allowed for higher pay, new ships and fighter jets and a big jump in spending on missile defence, but the budget includes no provision for the cost of a war in Iraq; and, regardless of a war, the Bush team is expected to ask for more defence money later in the year.
Homeland security gets a big boost. The 22 government agencies that recently merged into the new Department for Homeland Security get $36.2 billion, a 7.4% increase in their funds. Plenty more money goes on foreign aid, as Mr Bush begins to pony up the $15 billion he has pledged to fighting AIDS over the next five years. And military veterans get a lot more to pay for their health costs.
Everywhere else, however, the squeeze is on. Only two departments—Labour and Justice—see outright declines in their funding. But in most cases the budget proposes rises at, or below, the rate of inflation. After the spending binge of the late 1990s, such restraint will be tough for the big domestic departments.
Behind this brutality lurks further radicalism. Mr Bush wants to revamp the way that some social services are provided. Potentially the biggest change is in Medicare, the huge government medical plan for old people. Mr Bush's budget candidly admits that Medicare faces unfunded liabilities of about $13.5 trillion. His solution is still sketchy, but the basic idea is to spend $400 billion over the next ten years providing a prescription-drug benefit to encourage old people to enrol in competitive and less costly health-care plans.
Whittling down government's role
This strategy of cash today for reorganisation tomorrow also applies to Medicaid, the health-care programme for poor people, which is paid for jointly by the states and the federal government. Mr Bush wants to change the structure of federal payments to the scheme. For the next seven years states would get more money, but in return there would be long-term limits on federal support.
The budget also wants to revamp job training and unemployment benefits as well as Head Start, the pre-school programme for poor children, largely by shifting responsibility to the states. Moreover, Mr Bush wants tougher monitoring of who is eligible for free school lunches, refundable tax credits and other benefits targeted at the poor. The official goal is to make America's safety-net more efficient. It should also reduce the federal government's involvement.
It won't balance the books, though. Mr Bush's budget documents show what his rhetoric denies: deficits are set to stay. Next year, his team expects a deficit of $307 billion. At just under 3% of GDP, that is very much worse than they forecast only six months ago, but still relatively modest compared to the early Reagan years, when the deficit hit 6% of GDP (see chart).
By 2008, the last full year of the Bush team's forecast, the budget deficit is expected to be just under 1.5% of GDP. That is modest, too, but extremely unrealistic. It excludes the cost of an Iraq war, the cost of fixing the alternative minimum tax (which everyone knows must happen and which could cost $500 billion over ten years), and the cost of modernising Social Security, another huge reform that Mr Bush has surely not forgotten about. Besides, the full impact of the lost revenue from many of Mr Bush's tax cuts will not kick in until well after 2008, when this budget conveniently stops.
The prospect of long-term deficits has set the Democrats howling. John Spratt, the top Democrat on the House budget committee, has called the budget “the most damaging in US fiscal history.” Tom Daschle, the Senate minority leader, has dubbed it “a budget-busting epic disaster”. Even many Republicans are uneasy about the fiscal effect of more big tax cuts—especially Mr Bush's plan to eliminate the taxation of dividends.
All of which suggests that Mr Bush won't get all he asks for in this budget. But the truth is that even if Congress waters it down, this budget is likely to mark a substantial shift of fiscal priorities. America appears to be heading not just towards neo-Reaganism, but quite possibly towards something beyond it.
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