January 31, 2006
Congress Should Not Extend All Tax Cuts, Especially 'Death Tax'
By Mort KondrackeIn his State of the Union speech Tuesday night, President Bush plans to call for making all of his tax cuts permanent. That will cost at least $2 trillion over 10 years - probably nearer to $4 trillion - and kill chances for balancing the budget.
Arguably, Bush's tax cuts brought the economy out of the 2001 recession, but budget experts say they won't pay for themselves. Nor can the economy grow its way out of the coming baby boomer retirement crisis.
The responsible answer to the nation's fiscal fix is to cut back on Social Security and Medicare benefits, preferably on a means-tested basis, and to raise taxes. But in the current polarized environment in Washington, D.C., Republicans want only tax cuts and benefit reductions. Democrats want bigger benefits - a richer prescription drug plan for seniors, for instance - and tax increases. The twain never meet. They just shout at each other.
To me, the most sensible first step to fiscal sanity would be to reform, but not repeal, the estate tax, which could save as much as $400 billion over 10 years. But Republicans are wedded to the idea of repealing what they call the "death tax," even though it applies to only the richest 0.5 percent of taxpayers.
The Congressional Budget Office's new budget outlook, issued last week, shows that the federal budget actually could be balanced and go into small surplus in 2012 if Bush's tax cuts are not extended.
But if they are all made permanent - and some of them should be - the deficit rises $300 billion to $350 billion a year from 2012 to 2016, the end of the CBO budget window, for a net 2007-2016 cost of $2 trillion, including interest.
And this does not count the cost of adjusting the Alternative Minimum Tax, which practically everyone agrees should not burden the middle class. The CBO estimates that doing this will cost $630 billion.On top of current deficit projections in the $250 billion range from 2006 to 2011 - and these may be optimistic, considering that this year's deficit may be $360 billion - the total 2007-2012 debt pileup could be $3.8 trillion.
Such deficits are sustainable in a growing economy - they'd amount to 2 percent to 3 percent of the gross domestic product - but the CBO and other budget projectors all anticipate a ballooning of health-related costs as the baby boomers retire, threatening to swallow the entire federal budget by 2050.
As the CBO put it, beyond 2016, Social Security, Medicare and Medicaid "will exert pressures on the budget that economic growth alone is unlikely to alleviate."
Its report concluded that "a sizable reduction in the growth of spending, and perhaps a sizable increase in taxes as a share of the economy will be necessary for fiscal stability to be at all likely in the coming decades."
Contrary to GOP theology, tax cuts don't pay for themselves. "They don't," former CBO Director Douglas Holtz-Eakin told me in an interview. And, asked what kind of productivity and GDP growth rates it would take to pay currently promised retirement benefits, he said, "There aren't any on this planet that I am willing to put out there.
"You'd have to have one-in-100 years productivity growth and you'd have to have it every year for 50 years. You don't make it. Don't even think about it."
A CBO study last year showed that, at best, a 10 percent across-the-board reduction in income tax rates would recover 22 percent of the revenue it cost through supply-side and stimulative effects in the first five years. That is, it would cost 78 percent of its face amount.
But in the second five years, depending on economic conditions, it would produce no revenue recovery and increase the deficit by 5 percent to 32 percent.
Administration officials say that Bush plans to recommend new reductions in Medicare and Medicaid benefits at the same time he proposes much bigger long-term tax reductions. Some tax cuts surely should be extended, including creation of a 10 percent rate that took millions of lower-income earners off the tax rolls entirely, as well as reductions in capital gains and dividend tax rates designed to encourage investment.
But if there's a tax break that shouldn't be permanent, it's the elimination of the inheritance tax, which not only discourages charitable giving but also benefits only the very richest families in the country.
Most of those families can afford to buy life insurance policies to offset taxes - which is why the insurance industry opposes repeal. "I am institutionally and intestinally against huge blocks of inherited wealth," Frank Keating, president of the American Council of Life Insurers, said last year. "I don't think we need a Viscount of Enron or the Duke of Microsoft."
Actually, the father of the king of Microsoft, Bill Gates Sr., is one of the foremost opponents of complete "death tax" repeal. Under current law, increasing numbers of wealthy families will be shielded from paying inheritance taxes until 2009. Then, for one year, all will be. But the next year and thereafter, all estates worth more than $1 million will be taxed at a 55 percent rate.
Clearly, the law should be changed - but not to extent of total elimination. A middle-ground solution that excludes the first $3.5 million from tax and hits the remainder at the top individual rate of 45 percent would cost about $360 billion over 10 years - a lot less than $1 trillion, the cost of repeal.
Opponents of the estate tax say it amounts to double taxation of income. But the fact is that most of the money in big estates is accumulated capital gains that have never been taxed.
Bush won't propose tax increases, but Congress can impose them by not agreeing to a permanent extension of his tax cuts. That, plus some cutbacks in entitlement benefits, could put the country on the road to fiscal health.
Mort Kondracke is the Executive Editor of Roll Call.
http://www.realclearpolitics.com/Commentary/com-1_31_06_MK.html