Once re-elected, Bush has announced several plans, such as a partial privitization of social security, making his tax cuts permanent, medicare reform, changing the tax system, etc. Now, I’m not truly interested here in discussing the wisdom of these plans themselves. But what I do think is indisputable is that each of these plans is going to cost the federal government a great deal of money, at least in the short term. My question is, where is he going to get it?
Raise taxes – I don’t think I have to discuss why this is not going to happen.
Cut spending – The sheer scale of these programs is going to make funding them simply by cutting spending problematic at least, especially given how cuts in the most expensive aspects of the government, such as defense, social security, medicare, etc, are going to face nasty political consquences. Bush might not need to worry about re-election, but the Senate Republicans sure do. Even places did exist where it was politically possible to make cuts significant enough to fund these programs, Bush has so far (and I think even most conservatives will agree with me here) shown abslutely no interest in spending cuts to fund things during his first four years.
Deficit spending – This was the favored method during his first four terms, but is raising the current account deficit even more going to be feasible? Recently, Alan Greenspan came out strongly against it, and a study was recently released (no link, subscription only) where former chairman of the Fed Paul Volkner also predicted a currency crisis in the next five years. I simply do not think that increasing deficit spending is in the cards, if only because I feel that there are enough moderate Republicans to actually oppose this sort of thing. Or at least try to hedge their bets in case things go wrong, and thus be able to distance themselves from it.
So, is there another way of raising money that I’m not seeing? How do you guys think Bush will fund all of this?
Tax reform. Bush says this is going to be revenue neutral. That remains to be seen, but for now there’s nothing to discuss.
Social Security. This is a tough one. Yes, the money paid into the system right now is going to current retirees, rather than being invested as it’s supposed to. So privatizing part of it will mean a shortfall on the social security system. However, the money is already being borrowed. Paying current retirees with someone else’s retirement funds IS deficit spending. So he might make the case that giving the payers a few percent of their money back for private investment, and borrowing the funds to make up the SS shortfall is essentially revenue neutral, exchanging one form of debt for another.
Some of the others you mentioned will definitely have a cost. I have no idea what Bush’s plan is to pay for those. It’s time to pay down the deficit, though. I think it would be a big mistake to borrow more money for new social spending.
I think Bush’s plan, or rather the plan of whoever makes decisions in this administration, is that now that they’ve won the election they can forget about most of the promised spending increases. Little things that are important for favored special interest groups may go forward. For instance, the 1.5 billion to promote marriage is a big selling point on the religious right, so they’ll probably keep that. But as for Social Security Privatization, forget it.
On the subject of Sam’s first point: I know Bush has said he wants his tax reform to be revenue-neutral. And I assume that he wants to lower or eliminate the capital-gains tax. And I also assume he’s not going to make the top bracket any higher. So if he does these things, and the wealthiest people in the country end up paying less (which would undoubtedly be the case if the capital-gains tax were lowered), AND it’s revenue-neutral, would that not result in the lower and middle classes paying more?
If my assumptions are inconsistent with Bush’s plan, please let me know, and I’d really appreciate it if you could do so without being snippy. This is an honest inquiry, not Bush-bashing.
The way I understand it is that lowering capital gains taxes can actually increase the taxes raised, at least in theory. So says Alan Greenspan:
“The point I made at the Budget Committee was that if the capital gains tax were eliminated, that we would presumably, over time, see increased economic growth which would raise revenues for the personal and corporate taxes as well as the other taxes we have. The crucial issue about the capital gains tax is not its revenue-raising capacity. I think it is a very poor tax for that purpose. Indeed, its major impact is to impede entrepreneurial activity and capital formation. While all taxes impede economic growth to one extent or another, the capital gains tax is at the far end of the scale.” (Comments by Federal Reserve Chairman Alan Greenspan in testimony before the U.S. Senate Banking Committee on February 25, 1997. From http://www.parl.gc.ca/36/2/parlbus/commbus/senate/Com-e/bank-E/rep-e/rep05may00-e.htm)
Basically the idea is that lowering the capital gains tax allows people to move money around in investments which grows the economy. The taxes lost by the cut in capital gains is made up by taxes in other areas.
OOPS, I phrased the last line badly. It should read:
Basically the idea is that lowering the capital gains tax allows people to move money around in investments which grows the economy. The taxes lost by the cut in capital gains is made up by increaed tax revenue in other areas due to economic growth.
Bah. I’ve never seen a truly revenue-neutral tax proposal. He might call for tax cuts for a limited time, count the expected revenue after expiration of these cuts to offset the tax cut, then when the expiration draws near campaign against their expiration as a tax increase.
The truth is, Bush has not shown any interest in fiscal responsibility. As a lame duck, why would he start now?
In that thread it appeared some of what Bush planned to do was cut tax breaks to help pay for his plans. So eliminating tax benefits is a 4th option, I don’t know if its the same as tax hikes.
"To pay for those large tax cuts, the administration is looking at eliminating both the deduction for state and local taxes, and the business tax deduction for employer-sponsored health insurance. That would raise nearly $926 billion over five years, according to White House and congressional documents.
Eliminating the state and local tax deduction, for example, would allow the administration to scuttle the alternative minimum tax and raise an extra $400 billion over 10 years, said Leonard E. Burman, a tax policy expert at the Urban Institute. That would be twice what the White House needs to fund the planned tax-free savings accounts, expanded retirement savings accounts and tax-free health savings accounts."
Specifically, it would penalize itemizers in those states. Itemizers tend to have higher incomes, and are more likely to have investment income that will be shielded. Also, starting this year taxpayers may elect to deduct sales taxes in lieu of state income tax, so we can’t even say just now that the burden will necessarily shift to states with high income taxes. I don’t think we have enough information at this point to say where, if at all, the burden will shift.
The same is probably true of potentially ending the business-tax deduction for employer health care, but the dislocation associated with this is just so huge that I haven’t really thought much about it. More likely is that a tax overhaul plan will use the possibility of doing this as a club to get full first=dollar deductibility for individual medical expenses.
Gosh, just about everybody with a mortgage itemizes, which opens the door to deduct the state and local taxes. I’d be amazed that states with high income taxes (or even those that have any income tax) came out winners here. But of course the proof is in the final proposal which we don’t have yet. Thanks for the heads up on the sales tax option, I’ll have to look into it.
Yeah…Well, this is basically the old supply-side magic of which there is basically zero evidence for. And, while Greenspan might be good with interest rates, his ability to predict future surplusses or deficits is probably worse than chance.
Bush wants to simplify the tax system by getting rid of the myriad tax exemptions and shelters, and then using the revenue gained from that to flatten the tax rate. Since the rich are disproportionally the ones who use tax shelters and benefits, they’d see their taxes raised from simplification, but get that back through rate cuts.
And to satisfy the skeptics - who suspect that rhetoric about tax reform is just a cover story for redistributing income to the rich - they will, of course, wait for the revenue to come rolling in before the rate cuts take effect.