Sunday, March 20, 2005

Washington's Fiscal Meltdown

The New York Times
March 20, 2005

Washington's Fiscal Meltdown

Before leaving town for a two-week spring break, Congress indulged in its own form of March Madness. The Republican majority in the House and the Senate passed budget blueprints for 2006 that slash domestic spending by upwards of $150 billion over the next five years. Yet they still managed to increase the projected deficit by more than $125 billion over the same period (and by more than $1 trillion through 2015). How is it possible to produce that much red ink while slashing spending? Easy. Just cut revenue by giving huge tax cuts to - surprise, surprise - high earners and wealthy investors. The lawmakers will not make any final decisions until they cobble their separate proposals into one official budget later in the year, but the early signs are all bad - pointing to the least sensible tax cuts for the least needy recipients with no thought to the exploding deficit.

Of all the favors they are determined to dispense, tax cutters in both the House and Senate are most intent on extending the special low tax rates for dividends and capital gains, through 2010. The preferential rates are not scheduled to expire until 2008, but lawmakers want to act now, apparently to spare their constituents worry about the future. And who are those fretful constituents? In 2005 alone, almost half of the tax savings from dividend and capital gains rate cuts will go to investors who make more than $1 million a year, the top 0.2 percent of the income ladder. Nearly three-quarters of the tax benefits will go to those making more than $200,000, about the top 3 percent. The cost to everyone else in the form of forgone revenue will be $23 billion.

Also remarkable for their largess are two high-end tax breaks that would increase the amount well-heeled taxpayers would be allowed to write off for dependents and other expenses. They were enacted in 2001, but have been delayed. Now the budget proposals let them take effect. Once again, almost all of the tax savings would go to that lucky 3 percent of filers with incomes above $200,000. The lost revenue would amount to $95 billion over 10 years. In this particular piece of fiscal insanity, even the usual Republican argument - that letting a temporary tax break expire is the same thing as a tax increase - does not apply. These two changes have not even taken effect yet, so who would miss them if they never materialized? If you're President Bush, however, getting these two provisions is the tax policy equivalent of going all the way to Baghdad. The president's father originally allowed the deduction limitations on wealthy filers as part of the 1991 budget, the one that violated Bush père's "no new taxes" pledge and, in so doing, helped to end his chances for re-election.

The wealthy would also be on the receiving end of two new tax-sheltered savings plans favored by President Bush: the retirement savings account and the lifetime savings account. These were not embraced by name by the Congressional budget leaders. But Congress could easily include them in the final budget, since they will not start losing revenue - about $30 billion a year - until much later, when investors cash them in tax-free. The accounts would allow a couple to shelter $20,000 annually, as well as $5,000 for each of their children, on top of however much they may already be investing in other tax-favored plans. None of this will be any help to the vast majority of average Americans, who do not even take full advantage of current I.R.A.'s.

And then there is the 11th-hour tax cut slipped into the Senate proposal. It would repeal an income tax on Social Security benefits that applies to the wealthiest 20 percent or so of beneficiaries and whose revenue is dedicated to the Medicare hospital trust fund. The repeal would accelerate the fund's projected insolvency by four years, to 2015 from 2019. Now there's a plan! Give the best-off elderly a tax break and put all of the elderly who may have to go into the hospital at greater financial risk.

When you step back and look at it, the collective tax-cutting psyche of Mr. Bush and his partisans appears to border dangerously on the grandiose. How else to explain their relentless profligacy in the face of the unprecedented Bush-era swing from budget surplus to deficit, the unmistakable long-term trend of a rich-get-richer, poor-get-poorer income distribution, the ballooning costs of war, the weaker dollar, rising oil prices and record deficits in trade and investment - which now require the United States to borrow $2.1 billion a day from abroad? It's time for the people, the ultimate referees in a democracy, to call a timeout.