A Guns and Caviar Approach

By William G. Gale and Peter R. Orszag

February 10, 2002

The Bush administration's new economic proposals are almost literally wrapped in the flag, with the stars and stripes adorning the cover of this year's budget. As that cover emphasizes, the country needs to finance a war on terrorism over the next several years. But there is much more to the President's economic plan than the defense build-up, and the other proposals are fiscally reckless and regressive.

In light of the massive deterioration in the budget over the past year and the nation's increased defense needs, freezing the tax cuts planned for the future would be more responsible - and fairer - than the administration's approach.

Last January, the Congressional Budget Office projected surpluses outside of the Social Security and Medicare trust funds of about $2.7 trillion over the next 10 years. The president used such projections to promise that he could strengthen education and defense, reform Medicare, save Social Security, pay down record amounts of public debt, and still have money left over to finance the biggest tax cut in 20 years.

Now, a scant year later, the budget outside of Social Security and Medicare faces a deficit of $1 trillion through 2011, even if no new programs are enacted.

Despite this dramatic deterioration in the budget outlook, there's no question that we need to devote more resources to defense and homeland security. Indeed, the administration's budget proposes roughly $625 billion over the next 10 years in new spending in these areas. Given the bipartisan agreement that an aggressive war on terrorism is justified, the real issue is who will pay for these costs.

One option would be to impose the burdens on those who could most afford it, which is the course we favor. Instead, the administration's budget pays for the war on terrorism by cutting spending on programs that primarily help lower-and middle-income households and by incurring debt to be paid by future generations.

Adjusted for inflation, the president proposes to reduce per-person spending on discretionary items other than homeland security by more than 10 percent by the end of the decade. These programs include low-income energy assistance, environmental protection, and job training and many other initiatives. Many of these programs provide significant support to low-and middle-income households.

Rather than providing any fiscal restraint on the tax side, the administration actually proposes significant new tax cuts of about $675 billion between 2003 and 2012. These new tax cuts are half as large as the cuts enacted last year, when the surplus was trillions of dollars higher.

Furthermore, the proposed new tax cuts are larger than the proposed increases for defense and homeland security. So much for whether the budget book is true to its cover.

What could possibly justify financing a war by cutting social programs for lower-income households and then making the required program cuts larger by slashing taxes on the well-off further? Boosting the economy out of recession is not the reason. Other than the president's stimulus plan, which Congress already rejected, only 4 percent of the tax cuts would occur in the next two years and almost two-thirds are postponed until 2011.

Moreover, the vast portion of these cuts will aid high-income households. Thus, the Administration is saying in blunt terms that even with the decline in the budget surplus and the war on terrorism, it is more important to cut taxes for high-income households in 2011 than it is to maintain the current social safety net.

The Administration invokes history to justify its approach, but its analogies are flawed. The administration claims that it must avoid the "guns and butter" approach of the 1960s (when President Johnson expanded war and domestic spending at the same time). But the administration is instead proposing a "guns and caviar" approach: increased defense spending and lower taxes for high-income households. Tax cuts are just as harmful for the budget as domestic spending increases.

The administration also claims that Franklin D. Roosevelt cut non-war-related spending to help finance World War II. But spending cuts played only a small part in financing the war: President Roosevelt also tripled the level of taxes. Instead, the Bush Administration is proposing regressive future tax cuts in the middle of a war.

The most telling comparison may be with President Reagan. Like the current administration, President Reagan dramatically cut taxes and raised defense spending upon entering office in 1981. But unlike the Bush administration, Ronald Reagan adjusted his tax cut when the situation demanded it. He agreed to a significant tax increase in 1982, after it became clear that the earlier changes would decimate the budget. Unfortunately, even with those modifications, the net result was huge budget deficits throughout the 1980s.

With the coming retirement of the baby boomers, the nation cannot afford another experiment with fiscal irresponsibility. The massive deterioration of the budget surplus in general - and the administration's continuing insistence on tax cuts in particular - will eliminate any chance of significantly reforming Social Security or Medicare in the near future.

Ironically, the administration's focus on new tax cuts forces it to ignore real tax problems that the nation must address. By 2012, 39 million taxpayers will be ensnared in the complexities of the alternative minimum tax. But the administration proposes nothing to fix the problem - perhaps because a real fix would cost another $500 billion or so. The administration also gives lip service to tax simplification, but its own proposals make the tax system more complex, and leave no money to reform the system.

After the events of last year, Congress and voters should be doubly suspicious of accepting the tax cut elixir a second time around. The massive deterioration in the budget outlook over the next decade is fueled in large part by last year's substantial and regressive tax cut. In light of this fact, it is simply wrong for the administration to propose financing the war on terrorism on the backs of low-and middle-income households and future generations - while further expanding tax cuts for higher-income households.

We propose a different approach, one that is both more responsible and more fair. Rather than passing new tax cuts, Congress should freeze the tax cuts that were passed last year but have not yet taken effect. To be clear: we are not suggesting that the tax cuts that became effective last year should be removed, just that the ones planned for the future be put on hold until they become affordable.

Freezing the future tax cuts would be fiscally responsible - easily paying for the increase in defense and homeland security spending. It would also be fair - the future cuts overwhelmingly benefit the highest-income households, whereas the tax cuts that came into effect last year were more equitably distributed. And it could even help the economy now. The prospect of lower future deficits would likely reduce interest rates immediately.

By freezing the future cuts, those most able to afford it could finance the war on terrorism. Since we need more guns, we'll have to give up a little caviar too.