Faced with the prospect of continued economic stagnation, President Bush last week unveiled a new package of tax cuts designed to promote growth and preserve America's economic vitality. Speaking to the Economic Club of Chicago on Jan. 7, Bush proposed to stimulate the economy primarily by reducing income tax rates and eliminating the tax on corporate dividend payments. But although tax cuts may be the path to renewed prosperity, they are more assuredly the path to renewed budget deficits and the administration should reconsider its stimulus plan. Unless the proposed tax cuts are accompanied by commensurate cuts in spending, their only result will be a long period of budget deficits whose damage to the economy far outweighs any initial stimulus the Bush plan might offer.
Despite signs that last year's recession is past, the American economy remains relatively weak and there is reason for some economic stimulus package. Unemployment remains at an eight-year high of 6 percent and last quarter's growth rate was only 1 percent. Given these indications of continuing economic malaise, the administration's concern is well-founded. But large, long-term tax cuts must be considered cautiously in times of rising government spending and the administration should show greater restraint as it ponders a new round of tax cutting.
After four years of budget surpluses, the federal government ran a deficit of $106 billion last year. Although some of this shortfall can be attributed to slow growth and the unexpected cost of fighting a war in Afghanistan, last year's deficits are part of a troubling pattern. According to the White House Office of Management and Budget, federal spending has grown 45 percent over the last five years and will continue to increase in the foreseeable future. Taken together with the likely (and somewhat unknown) costs of a war in Iraq, this information suggests that budget deficits may continue even beyond those projected for 2003 and 2004.
Amid rising government spending and renewed budget deficits, large, permanent tax cuts are an irresponsible indulgence. If the administration's proposal passes Congress intact (and the Democrats' tepid opposition to last year's tax cut suggests that it will), the cost will be more than $670 billion over the next 10 years. According to White House estimates, such a tax cut could contribute to a $300 billion deficit next year, exceeding even the record deficit of $292 billion in 1992, the last year of the previous Bush administration.
If these deficits emerge as expected and continue in future years, the costs to the American economy may well exceed the short-term benefits of a large tax cut. The large-scale government borrowing needed to finance deficits will put upward pressure on interest rates and reduce the funds available for productive, private sector investment. It is precisely this investment that Bush means to encourage by his tax cuts, but the overall effect of the stimulus plan may be negative if hundreds of billions of dollars are consumed by deficit finance in the coming years. And besides its ill effects on private investment, a large federal debt will be a burden to policymakers well beyond Bush's tenure in office.
In addition to causing economic problems, renewed budget deficits would mark an unfortunate return to the spendthrift ways of previous administrations. Among the most welcome developments of the 1990s was the disappearance of federal budget deficits as a constant fact of American life. Deficit spending is acceptable when national emergency demands it, but the continual inability of politicians to meet budgetary constraints is simply irresponsible. Spending and tax cutting may be popular, but government priorities are not so important as to transcend economic reality. The administration cannot propose a $670 billion tax cut on the simple assumption that future governments will pay for it later.
Given the economic and symbolic problems of a lingering budget deficit, the administration should only insist on a major tax cut if it is prepared to make similar cuts in spending. But since this seems unlikely, the administration should drop its plans for large, permanent tax cuts in favor of a smaller, one-time tax break less likely to damage America's public finances. Such a tax cut should strike a balance between the need for economic stimulus and the obligation of good government to maintain a balanced budget.
The administration is correct in its assessment of America's economic weakness, but it must not sacrifice long-term economic vitality for short-term stimulus. An extravagant tax cut accompanied by rising government spending is economically and politically irresponsible and the administration would do well to reconsider its stimulus plan.
(Alec Solotorovsky's column appears Fridays in The Cavalier Daily. He can be reached at asolotorovsky@cavalierdaily.com.)
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