Budget boredom

Alan Reynolds
Posted: Feb 10, 2005 12:00 AM

Do the oversized partisan newspapers really have to be so utterly, boringly predictable? When the new budget came out, reactions from the usual suspects might as well have been copied and pasted from previous "news" and editorials during any year in which any Republican president dared to feign the slightest degree of frugality (President Clinton was seriously frugal, but the press cuts Democrats a lot of extra slack).
 A recent Washington Post editorial instantly decried any and all spending cuts "draconian" or "dramatic," not to mention "unrealistic." What a shock that was. An L.A. Times editorial, accidentally misplaced on the news page, whined that President Bush's proposed haircut for a few budget items "will touch people on food stamps and farmers on price supports, children under Medicare and adults in public housing."

 Did Bush somehow forget to brutalize widows and orphans? That piece went on to moan and groan about the cruelty of forcing California rice and cotton farmers to make due with annual subsidies of merely a quarter of million dollars, as though such a sum is equivalent to the minimum wage. Never mind that those who farm vegetables and fruit in California (including terrific wine grapes) get by just fine without subsidies.

 One thing that makes the banal media mantra in favor of lavish spending particularly tasteless at this time is that the discussions of this year's budget have somehow managed to totally ignore the wild spending spree during President Bush's first term.

 When planned spending for 2006 is compared with actual spending in 2001, it becomes ridiculous to pretend there is anything "draconian" or "breathtaking" about the president's belated tap on the brakes. It is unsurprising and probably understandable that defense spending rose 38.6 percent from 2001 to 2006. What is less well known and harder to rationalize is that the increase in spending over those same five years was 39.8 percent for education, 41 percent for the judicial branch, 48.1 percent for the legislative branch, 56.4 percent for state and international aid and 84.5 percent for commerce.

 Even if we measure this spending surge in constant dollars, to adjust for inflation, overall spending is projected to rise more than 23 percent from 2001 to 2006. Since the economy (GDP) did not grow nearly that much, federal spending will have risen from 18.5 percent to 19.9 percent of GDP. Yet this is being called a "draconian" budget?

 Another tiresome canard is that the only reason federal spending cannot just keep rising faster than the economy forever (to 25 percent of GDP, then 35 percent, etc.) is that President Bush trimmed a few taxes. The Washington Post thus called the 2001-2003 tax cuts "unaffordable," claiming revenues would be $192 billion higher without them (about 1.5 percent of GDP). But that rosy figure depends entirely on the hidden assumption that the economy would be just as strong with higher tax rates as with lower tax rates. I am aware of no economic theory or evidence that suggests that might be true. Besides, the Congressional Budget Office estimates that federal tax revenues will rise by $177 billion this year alone -- an increase of 9.4 percent.

 New York Times writer Edmund Andrews opined that "Mr. Bush's tax cuts of 2001 and 2002 reduced (tax) rates on the wealthiest taxpayers and cut in half the tax on dividends and capital gains." That is not remotely true, of course -- not that veracity matters to anyone's career at The New York Times.

 Where did Andrews get the idea that Bush "cut in half" the tax on capital gains? It was Clinton, not Bush, who cut the tax on capital gains from 28 percent to 20 percent in 1997. President Bush trimmed that tax a bit more, to 15 percent, but 15 percent is scarcely "half" of 20 percent.

 Whether or not Bush cut the dividend tax in half depends on what tax bracket you were in. But those in high brackets didn't use to pay much tax on dividends because they kept any dividend-paying stocks inside tax-deferred pension accounts or tax-exempt foundations. When the media fog clears, we are going to find out that the amount of taxes on dividends rose quite substantially after the tax rate was cut, particularly among high-bracket taxpayers. I haven't done my taxes yet, but I'm sure my own dividend taxes for last year will be many times larger than before the dividend tax was cut.

 In case you didn't get it the first time, Andrews went on to say, "Mr. Bush's tax cuts of 2001 and 2003 went largely to the nation's wealthiest taxpayers." No matter how many times I keep reading this, I never quite get over the outright audacity of the Big Lie technique. It isn't just the author's confusion about halving the dividend and capital gains taxes, which typically yield higher revenues from the rich. Even if we focus on just the reductions in personal income tax rates, any notion that they "went largely to the nation's wealthiest taxpayers" makes sense only if one describes everyone who pays any income tax at all as among "the nation's wealthiest" (all actual taxpayers are in the top 60 percent, because 40 percent pay no income tax).

 Half the estimated revenue loss from reducing income tax rates was due to reducing from 15 percent to 10 percent rates on the first few thousand dollars of income. Whatever you think of that costly gesture (I think it was wasteful and inefficient), it certainly didn't go "largely to the nation's wealthiest taxpayers." The same is true of social gimmicks like the child tax credit and the marriage penalty fix, unless one imagines that all two-earner families with kids must be rich.

 The other rate reductions were spread quite evenly among all tax brackets. The overall package could only be said to largely benefit "the nation's wealthiest taxpayers" only because the top 5 percent (those earning more than $126,000 in 2002) pay 54 percent of all income taxes, so they should get about half of any even-handed tax cut.

 In the long run, the president's most important budgetary initiative by far is not in the budget at all, but in his proposal to moderate the real growth of Social Security benefits. Social Security outlays were 4.35 percent of GDP in 2003, but would be half again as large by 2050 if nothing were done.

 As for all the banal commentary about draconian budget cuts and unaffordable tax cuts, I've heard it all too many times before. Please wake me up if somebody at The New York Times, L.A. Times or Washington Post ever has something novel or intelligent to say about taxes and spending. But somebody would have to wake them up first.