Too small a tax cut

Posted: Feb 22, 2001 12:00 AM
WASHINGTON -- The most enthusiastic congressional supporters of President Bush's proposed tax cut consider it much too small, but that's not all. They have reason to believe that government estimators, in both the administration and Congress, are up to their old tricks and badly underestimating tax revenue. Lawrence Hunter, chief economist of the Empower America think tank, has made calculations that lead him to believe that the Congressional Budget Office (CBO) has low-balled its estimated 10-year surplus of $5.6 trillion. He figures the realistic number is at least $1 trillion higher and probably another $1 trillion above that. Those numbers not only would permit a considerably larger tax cut than Bush's, estimated to lose $1.6 trillion in revenue, but in fact would mandate it. There are senior Bush policymakers who privately admit that Hunter and his allies in Congress have a point. But these officials claim they cannot change the rules in the middle of the game. Nor can they adjust unrealistic methods that bloat the revenue loss from Bush's cuts. Thus, Washington's high-tax establishment is able to use underestimated surplus projections and overestimated tax losses to claim the country cannot afford the president's program. "It's too small," Rep. Paul Ryan of Wisconsin, the most junior member of the Ways and Means Committee but a leading House supply-sider, told me. "It's not big enough to fit all the policy we want." A plan by Ryan and Rep. Patrick Toomey of Pennsylvania proposes deeper and faster income tax rate cuts and capital gains tax reductions. They also back individual pension reform, which might promote more economic growth than would rate cuts. All this totals $2.2 trillion in lost revenue, based on the inflexible model that unrealistically minimizes any feedback to the economy from growth-oriented initiatives. Liberals complain that is far too much for a $5.6 trillion surplus to sustain. Here is where Lawrence Hunter's calculations come in. In 1963, taxes rose $1.04 for every dollar in increased gross domestic product. In 1986, the figure was $1.18, and has been $1.37 since 1993. If the $1.04 figure of three decades ago were projected, the next decade's surplus would be about $6.5 trillion. The $1.18 of 15 years ago would produce a $7.6 trillion surplus, requiring a bigger tax cut to avert runaway federal spending. Yet, the CBO predicts only 99 cents of tax revenue on the dollar, leading to the $5.6 trillion surplus forecast. That assumes not merely an extraordinarily long recession but, against all reasonable expectations, a full decade of decline. This is absurd not merely for supply-side economists but also mainstream Republican lawmakers. Rep. Rob Portman of Ohio, House Republican Leadership chairman and congressional liaison to the Bush White House, told me the CBO forecast is "very conservative" and "unrealistic in the context of the last 10 years." The $1.6 trillion tax loss estimate is viewed the same way by Bush's economic advisers. Harvard Prof. Martin Feldstein says the revenue loss should be closer to $1.2 trillion, and others say it is more like $900 billion. According to Republican congressional sources, Budget Director Mitch Daniels privately agrees but says nothing can be done to affect this year's tax-budget debate. Treasury Secretary Paul O'Neill may be another matter. His testimony last week before the Ways and Means Committee distressed Republicans on two points. He continued lukewarm about the economic therapy of tax cuts. Worse yet, he indicated he favored a veto of any bill exceeding the ephemeral $1.6 trillion revenue loss because of the equally ephemeral $5.6 trillion surplus. Republicans in Congress agree that nothing can more clearly establish George W. Bush's presidential credibility than passing major tax reduction. Enacting more federal education aid may win raves from Teddy Kennedy, but that is not the political battleground. Consequently, the president is being urged to trumpet his tax cut every day in every way, even in unrelated venues. But the odds are stacked against Bush because of distorted forecasts from a Republican administration and a Republican-controlled Congress. Failure to break through this statistical fog threatens a token tax cut that opens the way for massive federal spending to effectively redistribute income. Numbers do matter.