Commentary

Dole’s Tax Cut/Balanced Budget: The Numbers Can Add Up

By Stephen Moore
September 9, 1996

The entire debate over Bob Dole’s 15 percent income tax cut proposal has been muddied by two big lies: one told by Democrats and one by Republicans.

The standard Democratic lie — amplified by deficit hawk groups such as the Concord Coalition and Ross Perot’s Reform Party — is that a 15 percent income tax cut is impossible without either blowing a hole through the deficit or making politically excruciating cuts in federal spending. The standard Republican lie is that the deficit can be eliminated by 2002 with a 15 percent tax cut without touching Social Security, Medicare, Medicaid, or the military budget.

The truth of the matter is probably not entirely satisfying to either party: we can (and should) cut taxes by 15 percent and we can (and should) balance the budget in no more than six years — but not in the sugar-coated way the Dole campaign is saying it can be done.

Let’s start by getting a handle on the magnitude of the task at hand. Over the next six years the federal government is expected to spend a cumulative $11.2 trillion. Adjusted for inflation, that’s twice what we spent to win World War I and World War II. Now, to balance the budget and pay for the Dole tax cut, the federal government will have to be “cut” to about

$10.2 trillion. Is it really unthinkable that the federal government would be allowed to spend “only” $10 trillion over the next six years?

The relentless demagoguery of “draconian budget cuts” is itself highly misleading. Here’s the surprising truth: if we balance the budget by 2002 with a 15 percent income tax cut, the federal government’s budget can still grow by $250 billion over the next six years. In other words, if the federal budget expands only from $1.57 trillion today to $1.82 trillion in 2002, the deficit disappears. Even that degree of fiscal discipline for a Congress accustomed to continually inflated budgets may not be easy; but it hardly requires a scorched-earth budget policy.

The common description of the Dole tax cut as “gigantic” and “irresponsible” is runaway hyperbole. Yes, federal Treasury revenues will be cut by just over $400 billion through 2002 (after a modest accounting for the faster economic growth expected as a result of the tax cut). And yes, $400 billion is a very big number. But that is out of a $10 trillion six-year tax take for the government. In other words, the Dole tax plan cuts 4 percent from the tax base and leaves 96 percent of all federal taxes in place. That should be called a tax slice, not a tax cut.

So where will the budget savings come from? This is where Republicans begin to economize with the facts. Democrats are right when they charge that there are blue smoke and mirrors in the Dole budget document (such as $34 billion in savings from spectrum auctions) and precious few specifics (though by comparison with other campaign documents, such as Clinton’s 1992 Putting People First, it’s a vast encyclopedia of budgetary minutiae).

The tax cut/balanced budget plan must start by ending the national fantasy that the cost savings needed to balance the budget and cut taxes can be found without touching entitlements for the elderly and military spending. Today, interest on the debt, Social Security, health care, and defense spending account for $1.1 trillion of the $1.57 trillion budget. In other words, Republicans, who say they are against big government and are committed to ending the scourge of deficit spending, want to exempt two-thirds of the budget from cutbacks. Dream on.

If a more rational and honest fiscal approach is adopted — one that places all federal expenditures under the microscope —the budget balancing task at hand is far from Herculean. Here are the two steps necessary:

1) Hold military spending constant at today’s level;

2) Hold growth of all nondefense expenditures to the rate of inflation through 2002.

That’s all that is required! If we do those two things, the deficit disappears in 2002 and the tax cut would be entirely paid for. The math is shown in the accompanying table. The baseline numbers come straight from the administration’s July 1996 Session Review of the Budget.

Military spending can easily be curtailed in this post-Cold War era without jeopardizing America’s national security. If we were to freeze military expenditures at $265 billion a year (rather than increase expenditures to $310 billion as the GOP wants to do), America would still have a military budget three times larger than that of any other nation — even larger than those of the rest of the industrialized world combined — and by far the most modern and sophisticated weapons arsenal. One way to start saving money is to bring most of the 100,000 troops home from Europe. Another is to eliminate the $5 billion to $10 billion in domestic pork that has somehow found its way into the defense budget.

Holding nondefense outlays to the inflation rate is a bigger challenge. Eliminating the useless Departments of Commerce and Energy would save $10 billion a year. Other corporate welfare cuts — the Export-Import Bank; the USDA Market Access Program, which subsidizes the Pillsbury dough boy, techno-pork, etc. —will yield $40 billion to $50 billion in savings. Eliminating foreign aid — which is the one area that the American public is rightly eager to see eviscerated — saves another $10 billion.

Medicare needs to be converted into a catastrophic insurance program by gradually raising the deductibles and making seniors increasingly responsible for covering their own routine medical costs. The retirement age needs to be raised as quickly as possible for Social Security and Medicare. Medicaid — which is doubling in size every seven years — should be block-granted and sent back to the states, as AFDC has been.

White House economist Laura Tyson recently snuffed that after putting together four budgets in the Clinton administration, she understands that the Dole budget and tax plan are “not plausible.” Maybe she and her boss weren’t trying hard enough. There is a plausible scenario for cutting taxes and balancing the budget. For Bob Dole to sell America on his tax plan, he has to lay out in a more candid and straightforward way what that scenario is.

I even suspect that when confronted with the real choices, Americans will buy it.

A BALANCED BUDGET WITH TAX CUTS
(Billions of Dollars)

1996 1997 1998 1999 2000 2001 2002 1997-2002
Expenditures with Defense Frozen and Nondefense Held to Inflation
1,572 1,611 1,652 1,693 1,736 1,780 1,826 10,298
Revenues with Dole Tax Cut and 30 Percent Revenue Feedback
1,453 1,495 1,540 1,587 1,659 1,723 1,835 9,839
Deficits
118 116 112 106 77 57 -9 459

Source: OMB, Mid-Session Review, July 1996.

Stephen Moore is director of fiscal policy studies at the Cato Institute.