In his State of the Union Address, President Bush is expected to pledge to balance the federal budget by 2012, a vow that conservatives believe means he could be tempted to make a compromise with congressional Democrats in which, like his father in 1990, he would break his campaign promise not to raise taxes.
Although the federal deficit dropped from its all-time high of $413 billion in 2004 to $258 billion last year, U.S. Comptroller General David Walker testified to the Senate Budget Committee last week it dropped only because of the Social Security surplus.
He said there will be “withdrawal pains in 2009, because, starting that year, the Social Security surplus will decline. By 2017, the Social Security surplus will be gone and, therefore, we’ll have to redeem these bonds. That means raise taxes, cut other spending or borrow more from foreign players.”
White House Spokesman Tony Snow has repeatedly refused to rule out raising taxes when asked by Human Events Political Editor John Gizzi about the possibility of a tax hike as part of any reform of the Social Security system.
“Everything is on the table,” Snow has told Gizzi again and again.
Conservative tax strategists convened on Capitol Hill earlier this week to give the President a firm message: Secure entitlement reform without a tax increase.
The event was hosted by Mallory Factor, chairman of the Free Enterprise Fund, who said it was important to “support and encourage the President to maintain his no-tax-increase pledge on Social Security reform.”
Participants included Rep. Patrick McHenry (R.-N.C.), John Berthoud, president of the National Taxpayers Union, Peter Ferrarra, director of entitlement reform at the Institute for Policy and Innovation (and author of the January 8 Human Events story, “Entitlement Reform Without a Tax Hike”), Tom Giovanetti, president of the Institute for Policy Innovation, Stephan Moore, editorial board member of the Wall Street Journal and Grover Norquist, president of Americans for Tax Reform.
The panelists agreed that it isn’t the size of the federal deficit that is problematic—it’s the level of government spending.
The Congressional Budget Office has projected that spending on Medicare, Medicaid and Social Security is on pace to consume more than 8% of the GDP today, but that will swell to nearly 19% by 2050.
Federal tax revenue is on pace to be higher than ever. Today, it is 18.4% of the GDP. In 2050, it will make up almost 24% of the GDP.
Thus, because the cost of entitlements is rising faster than tax receipts, a tax increase cannot take the place of real reform.
A January 16 paper by the Heritage Foundation said: “Even making the Bush tax cuts permanent would ease this surging tax burden only marginally—by less than one percentage point. This effect would likely be even smaller if dynamic scoring were used to calculate the impact these higher taxes would have on the economy, rather than just their bookkeeping ‘cost.’” The graph below illustrates how the tax rate would increase under three different likely tax scenarios.
Danger of Compromise
At the forum, Moore said it would be a “political disaster and a policy disaster as well” if the younger Bush repeated his father’s mistake. He called it “fiscal abuse against our children” who would be forced to pay for it. He referred to Wall Street Journal editorial published January 17 to support his argument the United States could “grow their way out” of the deficit, instead of raising taxes.
The editorial said: “The latest Treasury estimates for January show that tax receipts in December were $18 billion higher than a year earlier, helping boost the budget surplus for the month to $40 billion, up from $11 billion a year ago. . . . Meanwhile, for the first three months of fiscal 2007 through December, revenues climbed 8.1%, building on double-digit revenue increases in the previous two years. Corporate income taxes were up a remarkable 22.2% in the first fiscal quarter, showing that the government continues to grab a nice chunk of the rising business profits that so many of our politicians like to deplore.”
Norquist said: “You don’t solve the problem by raising taxes. The problem is there is too much spending. It’s not unfunded liabilities. It’s the size of government that is too big.” He warned Bush against striking a compromise with the Democrats that would include a tax increase. “Compromise doesn’t work … the party of trial lawyers, labor unions and tax spenders is a dead man walking,” he said.
Congressman McHenry has introduced a bill help stave off a tax increase. He is attempting to create an entitlement reform commission, comparable to the Base Realignment and Closure commission, to supervise any reform. But he said it would be created only “with the pre-condition you cannot raise taxes and cannot use any revenue increases in any way, shape or form for entitlement reform.”
“Compromise is a watchword for tax increases,” McHenry said. “In 1982, Ronald Reagan was promised $3 of spending cuts for every $1 dollar of tax increases. Well, we got the $1 of increase many times. That cut never materialized. Then it’s 1983, we don’t learn our lesson from 1982, and we want a permanent solution for Social Security reform. What do we do? We raise payroll taxes without fundamental reform.”
“Fast forward to 1990,” he said. “Former President Bush was promised by a Democratic Congress again, as if we didn’t learn from 1982 or 1983, a cut. That never happened. Then, we got the largest tax increase of our time.”