Will Bush Employ Tax Hikes to Address the Deficit?

Today, President Bush releases his budget for fiscal year 2005, which begins on Oct. 1. It is likely to be the most contentious of his presidency. Those on both the left and right have strong reasons to oppose key aspects of it. Consequently, it probably will be “dead on arrival,” even though Mr. Bush’s party controls Congress.

Democrats will play the same game they always play–condemning the deficit while simultaneously attacking the budget for being miserly in its treatment of education, health and any other issue on which they can score political points. They will say over and over again that the Bush tax cuts–and ONLY the tax cuts–are responsible for the deficit. But at the same time, they will make no serious effort to rescind them.

Republicans, on the other hand, have grown increasingly distressed at Mr. Bush’s budgetary profligacy. They will denounce proposed increases in spending everywhere outside the area of national security. However, without strong White House pressure to hold down spending, it is likely that congressional appropriators will again lard the budget with layers of pork barrel spending. Since they know that there is zero chance of a presidential veto, there is really nothing to stop them. After all, it is an election year for Congress, too.

At the end of the process in September, our nation’s fiscal situation will probably be in even worse shape than it is now. And that is very bad indeed, according to a report released last week by the Congressional Budget Office. Although the deficit is projected to disappear by 2014, this is only by making completely unrealistic assumptions, which CBO is required by law to make.

Chief among these is the assumption that all tax cuts enacted in the last 3 years will expire on schedule and that no new tax changes are enacted. It is important to remember that the price Republicans had to pay for using special legislative procedures in the Senate to avoid a filibuster is that all tax cuts enacted since 2001 will expire some time before 2010. Extending all of these provisions would reduce federal revenues by $2.3 trillion between 2005 and 2014.

Of course, no one believes this will happen. Indeed, it is a major goal of the White House and Republicans in Congress to make every tax cut enacted since 2001 permanent. However, the chances of their doing so this year are nonexistent. That would require 60 votes in the Senate–a few too many at the present time. The most we can expect is a temporary extension of provisions expiring this year, but even those can be put off until next year without raising anyone’s taxes.

Even if, by some miracle, Howard Dean is elected president in November and follows through on his promise to eliminate all the enacted tax cuts by vetoing efforts to extend them, there is still a big tax problem that will have to be addressed. That is the Alternative Minimum Tax, which will begin affecting vast numbers of Americans next year unless action is taken. CBO estimates that the number of taxpayers paying this tax–originally enacted solely to soak the rich–will rise from 2 million to 23 million by 2014.

No president is going to let this happen. Once a significant number of people are forced to pay this onerous tax, there will be a great outcry against it. But just keeping the tax from rising and affecting more people than it does now will reduce projected revenues by almost $500 billion between 2005 and 2014. The tax rises automatically because its thresholds are not indexed to inflation or real income growth. Thus as people’s incomes rise, they tend to get pushed up into the AMT.

Finally, even if Congress miraculously holds the line on domestic discretionary spending (which has risen by half a percent of the gross domestic product during the Bush Administration), there will still be the problem of entitlements. These are programs that do not require annual appropriations, spending for which is automatic. Although President Bush has pledged to reform Social Security, that is not where the biggest problem lies. Medicare is in far worse shape and he just made it worse still by adding a huge new drug benefit to the system.

Although spending for the drug benefit is small at first, it rises rapidly. From nothing this year and next, outlays are estimated to rise to $40 billion in 2006, $60 billion in 2007 and continue rising to $123 billion in 2014. Of course, actual spending will be far higher.

At some point Mr. Bush will have to address the deficit. I and many other conservatives fear that when the time comes, higher taxes, not spending cuts, will be the order of the day.