Commentary

How to Fight a Tax Hike

This article appeared in The Washington Times on March 19, 2006.

After championing big ideas such as tax and Social Security reform last year, the Bush administration has little on its fiscal agenda this year. The budget for 2007 would extend prior tax cuts, but missing is a plan for fundamental tax reform.

The president’s proposed line-item veto would help cut small-scale pork, but would do little to control overall growth in the $2.6 trillion federal budget.

The problem with standing aside and not pushing major reforms is that the deficit will soon begin a perpetual spiral upward because of rising entitlement costs.

Deficits are a problem because they provide an excuse for tax increases, as they did in 1982, 1984, 1990 and 1993. President Bush has held firm against tax increases but we may not be so lucky with the next president.

To avert tax increases and preserve the president’s successful income tax cuts, Republicans need to start cutting spending. If the Bush tax cuts expire because of deficit fears, a key policy advantage of the GOP expires, and so does the glue that holds the party’s coalition together.

The good news is that House conservatives in the Republican Study Committee understand the perilous problem and have introduced a bold spending cut plan. The RSC’s “Contract with America: Renewed” would balance the budget in five years with over 150 cuts to discretionary and entitlement programs.

Here is a sampling of the RSC’s proposals:

    • Corporate welfare: The RSC plan would scale back farm subsidies, subsidies for fossil fuels and renewable energy, and Commerce Department business subsidies. It would end subsidies for Amtrak, maritime interests and rural air service.

    • Entitlement programs: Medicaid would be turned into a block grant, and the annual growth in federal Medicaid costs would be limited to 4 percent. Medicare reforms would include higher premiums and deductibles, means-testing for the prescription benefit, and various changes to cut program costs.

    • Funding for state, local and private activities: The RSC plan would cut dozens of programs that are properly the responsibility of state governments and the private sector. These include housing subsidies, community development funding, student aid, K-12 education grants, and grants for local sewer and water facilities.

The plan would end grants to the states for highways and mass transit after 2009. Other state aid programs would be turned into block grants, which would cut federal costs and increase incentives for states to spend efficiently.

The RSC plan would end most foreign-aid spending, which is generally ineffective and often prevents poor countries from pursuing needed reforms. The plan would cut spending on manned space flight and eliminate subsidies for public broadcasting and the arts. Note that all these activities are funded more efficiently in the private sector.

There are some shortcomings to the RSC plan.

    (1) It doesn’t do enough to cut unneeded defense spending. Savings could be increased by cutting low-priority weapons systems and reducing our troop levels in Europe and Asia.

    (2) The RSC plan does not cut Social Security, even though that program is a key cause of our long-term budget problems. A simple and fair way to cut Social Security would link growth in initial benefits to increases in prices rather than wages.

Nonetheless, the RSC should be commended for showing fiscal leadership, especially because they don’t have political cover from the president for their proposals. Some may question how politically feasible such cuts are this year, but a similar package of cuts did pass the House back in 1995.

Eventually, the ballooning costs of entitlement programs will create such a budget squeeze Congress will have to pursue RSC-style cuts. Until then, it would be helpful if other politicians didn’t pretend we can afford the ever-rising costs of subsidies, entitlements, state aid and all the other giveaways.

The RSC’s new Contract with America provides a valuable reform roadmap that can guide the GOP back to fiscal sanity.

Chris Edwards is tax director at the Cato Institute and author of Downsizing the Federal Government.