SYNOPSIS: We start to see the consequences of the massive tax cut
During the debate over George W. Bush's tax cut, administration officials told wavering supporters not to worry. The Congressional Budget Office, they insisted, was underestimating future surpluses; in fact there would be plenty of money, even after the tax cut, for other priorities.
Whoops. No sooner had Mr. Bush signed that tax cut into law than those same officials began admitting that the budget outlook wasn't that rosy after all. In fact, revenue is dropping like a stone. A suspicious man might wonder about the timing: isn't it strange that the bad news on revenue came to light only after the tax cut had passed?
In any case, get ready for more bad news. When the Budget Office updates its projections next month, it is certain to mark them down, not up — and that will be just the beginning of a dismal trend. Forget about those budget surpluses as far as the eye can see; from now on the prospect is for chronic budget shortfalls.
By "shortfalls" I don't exactly mean deficits. The federal government as a whole will probably take in more money than it puts out for a decade or so, until the baby boomers reach retirement age. But more than all of this surplus will come from Medicare and Social Security. And those programs are supposed to run surpluses, to build up reserves for the demographic deluge. The rest of the budget will be in deficit; in effect, the tax cut will come at the expense of the retirement trust funds.
Of course, administration officials play down the sudden budget deterioration, saying that the surplus will return once the economy recovers. But it won't. Yes, corporate profits taxes — the big item in this year's revenue slump — will bounce at least partway back. But income tax receipts will steadily decline, as those huge tax cuts for the rich phase in. And the spending assumptions used to justify those tax cuts already look ludicrously low. In particular, the Bush administration has already asked for far more defense spending than it admitted it wanted before the tax cut passed, and Defense Secretary Donald Rumsfeld hasn't even started on his real shopping list.
None of this should come as a surprise. Anyone who was paying attention knew that to sell the tax cut Mr. Bush's people deliberately underestimated the cut's impact on revenues; deliberately underestimated the cost of delivering on the administration's promises on defense, education and prescription drugs; and deliberately swept under the rug other budget issues, like the need to fix the alternative minimum tax, that will inevitably subtract hundreds of billions from the surplus. In short, the claim that the tax cut was easily affordable given other priorities was what is technically known as a "lie."
The only real question was how long they would get away with it. Without the economic slump, they might have maintained plausible deniability until 2003 or 2004; because of the slump, the moment of truth is already here.
Now comes the spinning.
At first the Bush team's line will be that the economic slump is the sole cause of the shortfall. Once that line has been exhausted, they will move the goal posts — saying that while the Social Security surplus is in a "lockbox," the Medicare surplus is fair game. This position makes no sense; both programs serve retirees, so both should be accumulating reserves to deal with the baby boomers. But this argument might succeed in confusing some people.
Finally, when it becomes apparent that the tax cut will cut into the Social Security trust fund too — quite possibly as soon as next year — we'll be told that this doesn't matter, that the trust fund is a mere accounting fiction. (In fact, Treasury Secretary Paul O'Neill has already started saying this.) And in a way that's true. But it's an accounting fiction with a purpose — namely, to prevent irresponsible politicians from undermining the government's long-term ability to honor its promises. Alas, it failed.
If the Senate had known six weeks ago what it knows now, it wouldn't have approved that huge, irresponsible tax cut. But now it's too late; proposals to scale the cut back don't have much of a chance as long as this administration is in office.
The truth is that moderates who voted for that tax cut were snookered. And the nation will spend years paying for the consequences of their gullibility.
Originally published in The New York Times, 7.6.01