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A Times Editorial

Tax-cut implications

Over the long-term, President Bush's tax cut may offer more than we bargained for regarding government spending.

© St. Petersburg Times, published June 7, 2001

Over the long-term, President Bush's tax cut may offer more than we bargained for regarding government spending.

President Bush will sign the $1.35-trillion tax cut into law today, a remarkable political victory for a man who entered office less than five months ago after losing the popular vote. He got his way with a Senate whose Republican control was so tenuous it changed hands Wednesday with little more than a whimper. Yet he was able to persuade 12 Democratic senators to support a tax cut that will threaten their party's initiatives. He even gets credit for the most popular provision, a $300-per-person tax rebate, after it was forced on him by his opponents.

It is clear many Americans underestimated George W. Bush. Less certain is what we should make of his tax cut, which has serious implications for government spending over the next decade or longer.

The surplus. Bush won the debate on what to do with the estimated $5.6-trillion surplus over the next decade -- give much of it back to taxpayers. But many budget experts believe that surplus projection is grossly exaggerated, particularly since it was calculated on an unprecedented rise in productivity that has already begun to wane. With about $3.5-trillion of the surplus set aside for Social Security and Medicare and the true cost of the tax cut likely to reach $2-trillion when interest on unpaid federal debt is added, only about $1-trillion would be left.

If the surplus proves to be smaller and spending greater than predicted, then the money could disappear before any of it goes to reduce debt. What began as a hopeful exercise in paying down, if not actually eliminating, the deficit could end with little or no progress toward that goal.

Spending. Prominent Republicans admit that part of their motivation for the tax cut was to deny Democrats the money for popular spending programs. "If the Democrats could have spent the surplus on brand new government programs by the truckload, they could have expanded their base and potentially become the majority party for many years to come," said Sen. Phil Gramm, R-Texas.

But Republicans may have financially boxed themselves in as well. Bush has made much of his plan to increase spending on the military and education. Plus, he wants to build an ambitious missile defense system whose cost alone could run into the hundreds of billions. He may have denied himself any way of finding the necessary revenue without busting the budget. And no one believes congressional Democrats or Republicans will hold themselves to the unrealistic budget restraints fabricated to make the tax cut look responsible. The likely outcome: Over the next decade, some social programs will suffer while the nation once again may be pushed into debt for other priorities.

Fairness and simplicity. Yes, the tax cuts heavily favor the wealthy, although it is also true, as Bush says, that the wealthy pay the bulk of taxes. One hidden time bomb in the tax cut is that it left unchanged the Alternative Minimum Tax, created in the 1960s to stop wealthy Americans from avoiding taxes through numerous deductions and tax breaks. Currently, the AMT raises the tax bill for about 1.5-million wealthy Americans. But the AMT doesn't consider inflation, which could make millions more subject to increased taxes. Republicans didn't fix this problem because it would have further inflated the final cost of the tax cut. The result: As many as 35-million Americans with incomes from $72,000 to $627,000 and hefty deductions could see their tax cuts disappear by the end of the decade.

The way the new tax law repeals the inheritance tax is even more bizarre. It will be gradually eased through 2009, disappear in 2010, then be reinstated in full in 2011. The law adds a new burden on estates, a capital gains tax on their assets. Such machinations have guaranteed full employment for one class of Americans, tax experts.

Social Security and Medicare. Bush has promised a private investment option for Social Security savings and at least a rudimentary Medicare prescription drug benefit. Both of those programs are in jeopardy. Putting just 2 percent of workers' Social Security taxes in stock market accounts would cost $1-trillion each decade. That is the entirety of the remaining surplus under the most optimistic projection, and that is before any additional spending for the military or other programs. Bush has been very vague on how he could afford even a limited prescription drug program for the elderly poor.

Will any of this catch up with Bush before he faces the voters in a 2004 re-election bid? It's too early to tell. But Americans will be living with the consequences of the new tax law long into the future.

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