Republican 'nervous nellies' are key to getting a

Posted: Mar 13, 2001 12:00 AM
It appears that George W. Bush's biggest challenge in getting his tax cut passed is not the knee-jerk opposition of Democrats, but "Nervous Nellies" on the Republican side obsessed with the budget surplus. The latter may demand some sort of trigger mechanism that will cancel the tax cut in the event that surpluses do not emerge as expected. History, however, shows that triggers are unnecessary. Congresses and presidents have shown that taxes can be raised more easily than cut in the event that additional revenues are needed. One of the reasons people fret so much about deficits and surpluses is simply because they know about them. In years past, they didn't. Throughout most of American history, no one even bothered to project future revenues or spending. Congress just appropriated and the president spent, and at the end of the year they totaled things up. That was the budget process. Since the 1920s, the budget process has become more formalized. But until the Budget Act of 1974, presidents only budgeted for two years out. The Budget Act mandated a 5-year budget horizon, in order to better gauge the out-year effects of fiscal policy. But in most cases, the out-year projections were not estimates of what anyone really thought was going to happen, but assumptions for planning purposes. As computers and forecasting techniques became more sophisticated, those assumptions were replaced by formal estimates. That just means that the numbers had a slightly firmer analytical foundation. But it doesn't mean that they were more accurate. That is mainly because the underlying economic conditions, upon which all budget forecasts rest, were extremely volatile and difficult to predict. Also, as the budget and the economy grew larger, even the tiniest of forecast errors for things such as inflation or interest rates could throw the budget off by large dollar amounts. In the 1990s, the 5-year budget horizon was replaced by a 10-year horizon. This was done by Democrats mainly to thwart Republican tax-cutting efforts. The latter had learned how to design tax cuts so that their initial revenue impact was small, but grew in the out-years. Forcing revenue projections to be made for 10 years effectively killed this technique. The problem is that forecast errors rise exponentially the farther out one goes. Anyone's estimate of the budget one year out is likely to be more accurate than the best budget expert's projection for 10 years out. At some point, the numbers are just plain worthless. Yet, figures projected for a decade hence are treated in Congress as if they are written in stone, and have the same degree of accuracy as those one or two years ahead. Members of Congress mostly know that the economy and the budget far into the future cannot be predicted with any reasonable degree of accuracy. But they have become so accustomed to the use of 10-year projections that they often forget how flimsy they are. It also leads them to act as if budgets are made only once every 10 years, and that the actions they take today cannot be adjusted, reformed or reversed in future years. As a consequence, far more weight is placed on budget votes than is justified. This is most apparent in the area of tax policy. Tax cuts are treated as if they are immutable, permanent and never-changing legislation that will go on forever. For example, in 1979 Rep. Charles Vanik, D-Ohio, attacked Republican efforts to cut taxes, citing the continuing revenue loss from tax cuts during the Kennedy administration. "The 1962 cut has had a cumulative cost to the Treasury of $10 billion; the 1964 tax cut, $228 billion; the 1971 tax cut, $73.6 billion; and the 1975 tax cut, $56 billion," Vanik charged. Talking about taxes in this way is ridiculous. One might as well talk about the cumulative tax increase from the Revenue Act of 1942, a tax increase so large that it increased federal revenues by more than 70 percent the first year. For that matter, we should talk about the continuing tax increase resulting from passage of the 16th Amendment to the Constitution in 1913, which established the income tax. The point is that Congress changes taxes all the time. There were 22 major tax bills between 1968 and 1997. Some raised taxes and some cut taxes. So to isolate the impact of legislation that passed many years ago, as if no changes to the tax code have been made since, is just sophistry. Some liberals make a somewhat more sophisticated argument than Vanik did, saying that tax cuts are easy, while tax increases are hard. They imply that Congress is perpetually primed to cut taxes at the drop of a hat, while it must be dragged kicking and screaming into raising taxes. Hence, there is justification for going slow on tax cuts. The truth is that in recent years the exact opposite has been true. Congresses and presidents have proven themselves more than willing to enact major tax increases, but enact tax cuts only on very rare occasions. Between 1980 and 1997 there were 15 major tax bills enacted into law. Of these, only three were tax cuts, the rest being tax increases. And of the tax cuts, only one, the Economic Recovery Tax Act of 1981, was significant. What this tells us is that Congress and the White House undo tax cuts all the time, but only very seldom undo tax increases. Ronald Reagan reversed much of his 1981 tax cut the following year in the Tax Equity and Fiscal Responsibility Act of 1982, and signed into law six other major tax increases as well. But Bill Clinton's tax increase of 1993 still lives with us, long past the purpose for which it was enacted. If we passed budgets only once every 10 years, then perhaps the concerns of the "Nervous Nellies" would have validity. But the fact is that Congress can and will revisit the tax code next year and every year thereafter. If it turns out to be the case that Bush's tax cut is too large in some sense, I have no doubt that Congress will have no trouble finding the votes to reverse it.