Taxing Debate

Published January 12, 2007

National Review Online

The new Democratic leaders in Congress and President Bush have both taken steps in recent days with significant implications for the federal budget battles that lie ahead.

In one of their very first moves (pre-“100 hours,” as it were), the new House Democratic leaders reestablished the so-called “pay-as-you-go” budget rule. “Paygo” requires — at least during House consideration — offsetting spending cuts or tax increases for any new proposals which reduce taxes or increase entitlement spending. Democratic leaders put this rule in place with one clear target in mind: President Bush’s tax cuts, now scheduled to expire after 2010.

For his part, President Bush has shrewdly strengthened his position by completing recasting the budget debate. In an op-ed piece in the Wall Street Journal, the president announced that the budget he will submit to Congress in February will achieve balance in 2012, the fifth year of his five-year budget plan. The president provided little additional information, preferring to hold back critical details until the full budget is released. But he did make clear that the plan is constructed on the one fundamental principle that Democrats cannot agree to: no tax increases.
Democrats have responded to the president’s announcement with predictably dismissive comments. The Washington Post quotes a senior congressional aide who called the president’s plan “me-tooism,” apparently in reference to previously announced plans by the Budget Committee Chairmen to pursue the same five year goal. Others suggested that the president’s plan would be unrealistic because it would include unspecified or controversial spending cuts, omit the full costs of fixing the Alternative Minimum Tax (AMT), and not include the multiyear costs of waging the wars in Iraq and Afghanistan. Answers to some of these criticisms will have to wait for the President’s budget transmittal in early February. But it is clear from the rapid and critical response of key Democrats that the Bush announcement has struck a political nerve. Indeed, these Democrats understand that a Bush balanced-budget plan — with the tax cuts permanently extended and no further tax increases — threatens to undermine their carefully choreographed campaign to sell the American public on the inevitability of a tax increase and, in particular, the reversal of the Bush tax cuts.

The seeds of the coming budget conflict were planted in the Clinton era. After taking control of Congress in the 1994 election, Republicans constructed and passed a balanced budget plan with sizeable tax cuts. President Clinton promptly vetoed the legislation, stating that he too favored a balanced budget (perhaps the original “me-tooism”) but that the Republican spending cuts were inequitable, draconian, etc. The Clinton vetoes precipitated a political confrontation with the Congress, which, by all accounts, Clinton won. In the end, Republicans were forced to negotiate a compromise budget in 1997 after Clinton’s successful 1996 reelection. At the insistence of Clinton and his team, this compromise included both higher levels of spending and taxation than was proposed in the original Republican plan.

Soon after the 1997 budget deal was sealed, it became clear that the budget picture was far brighter than anyone had anticipated. A strong economy, the tech-stock boom, and other factors pushed federal revenues up rapidly, and the government ran the first budget surplus in three decades in 1998. Between 1997 and 2001, federal debt held by the public fell from about $3.8 trillion in 1997 to $3.3 trillion. Although Republicans initiated the push for a balanced budget, many veterans of the Clinton administration have since argued that it is the Democrats, not the Republicans, who should be viewed by the public as the party of “fiscal responsibility” because of the favorable budget picture that emerged in the late 1990s.

Of course, the Democratic self-identification with “fiscal responsibility” has hardened substantially during the Bush presidency. Indeed, the typical Democratic response to the large budget deficits that emerged during Bush’s first term was to say, essentially, “I told you so.” For these Democrats, it has become an article of political faith to assume that the only path to restored fiscal balance is higher taxes and reversal of the Bush tax cuts. Moreover, from their perspective, reversing the Bush tax policy would send an unambiguous message to the public that the Republican governing philosophy simply does not add up.

But what if the budget could be balanced without a tax increase? Here is a possibility that simply has not been on the Democratic radar, as it would score a direct hit on all of their most fundamental assumptions. In some sense, Democratic incredulity over such a possibility is understandable, as Bush himself has, until this year, steadfastly refused to get into a balanced budget debate with Democrats for fear it would disrupt more important priorities, particularly in the national security arena.

Now, however, conditions have changed sufficiently to make a balanced budget on Bush’s terms a real possibility, at least as a proposal. Federal revenues surged in both 2005 and 2006 — 15-percent and 12-percent annual increases, respectively — cutting the deficit in 2006 to just 1.9 percent of GDP, well below the recent historical average. Current revenue projections have not caught up, however, and still assume relatively slow revenue growth in 2007 (5 percent) and beyond. A modest upward revision of expected revenues would leave the budget within shooting distance of balance even without further spending cuts. Bush has apparently concluded it is worth the effort to cut spending as necessary to close the remaining gap and show to the world it is possible to govern responsibly with a low tax philosophy.

The only possible Democratic response to the Bush plan will be to attack the spending cuts, as they have done so often in the past and Clinton did in 1996. In doing so, they will expose the traditional differences between the parties on spending that have been papered over in recent years. While in the minority, it has been relatively easy for Democrats to attack Bush as a big spender even as they themselves proposed to expand government well beyond the Republican proposals (see, for instance, the 2003 Medicare drug-bill debate). As Democrats mount their attacks, the burden will be on the administration to do better than the Republican Congress did in showing that the spending restraint they propose is sound policy, consistent with a broadly supported view of limited government with adequate funding for programs that actually matter and work.

In the end, even with a balanced budget plan on the table, Bush may not see his tax cuts extended while he is president. Democrats — now in control of the congressional agenda — probably can stall consideration of such an extension until he leaves office. But submission of his balanced-budget plan will at least improve the odds that his tax cuts can be extended at some point. The mere presence of such a plan should help lay to rest the Democratic notion that fiscal responsibility always means higher taxes.

 — James C. Capretta, a Fellow at the Ethics and Public Policy Center, was an Associate Director at the Office of Management and Budget from 2001 to 2004.

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