One Starved Beast

Another sizzling quarter of growth in the economy barely affected the size of the bill Congress is leaving for future taxpayers, but it should force it to rethink some of the decisions it seems determined to make this winter.

Planned tax-cut extensions, at a time of 8 percent economic growth and the government unable to extend unemployment benefits, seem neither fair nor desirable. The political parties can debate whether it was the immediate tax breaks to individuals or the anticipated breaks to corporations that goosed the economy into moving. Neither side is likely to admit that the economy followed a predictable growth cycle and their work had little to do with the new growth. But both can certainly claim to have a major impact on the federal budget.

Stan Collender, managing director of the Federal Budget Consulting Group at Fleishman-Hillard Inc. and a columnist for the National Journal, sums up all the activity with this question: “Can you think of another year that saw a tax cut, a significant increase in appropriations, a major new entitlement program, and a substantial appropriation for waging a war and rebuilding the country we fought – all at the same time?”

The deficit at the close of fiscal year 2003 in October stood at $374 billion, 3.5 percent of gross domestic product. Given all that has happened over the last year, this high level would not be cause for alarm – if Congress and the administration were finished. Republicans have been knocked for allowing federal spending to increase significantly while promoting fiscal conservatism, but, as the liberal Center on Budget and Policy Priorities points out, revenue reduction – otherwise known as tax cuts or, in fund-raising appeals, “starving the beast” – has had a much larger effect on the deficit. Since 2000 the average annual decrease in revenues, adjusted for inflation and population growth, has been 6.8 percent. Expenditures during that time have increased annually 3.5 percent. And there are more cuts to come.

The House of Representatives has already passed its bill to extend 14 “temporary” tax breaks. The $7 billion in gifts to friends slid by on a voice vote after an hour of debate, according to the center. But the long-term cost is likely to be even higher because some of the breaks were extended for only a year, with plans to extend those extensions then. The center estimates that if all the Senate’s tax-cut provisions pass – and all the supposed offsets accompanying them pass too – revenue losses over 10 years would equal $24 billion, with $6 billion in additional interest payments on the federal debt.

Congress should do three things about this: Decide it cares about its responsibility to provide the truly needy with the necessities of life and economic opportunity for all Americans and to do this it must stop throttling budget revenues. Decide that it is irresponsible to heap a large debt onto the future for tax cuts today. Decide that some forms of federal relief can provide the economy with a stronger push than tax cuts.

On this last point, consider the Temporary Extended Unemployment Compensation program, created last year to give additional benefits to those who had exhausted their regular, state-funded benefits. Not only is the employment situation worse now in some ways than it was when TEUC was created, Congress is seriously thinking of letting it die. This is short-sighted. A well-known Economy.com study last year concluded that each dollar of this subsidy generated an increase in real gross domestic product of $1.73, while each dollar for the corporate tax breaks it studied generated only 35 cents.

This idea is at once simple and endlessly complicated. Simple, because putting money into the hands of people likely to spend it immediately has clear effects; complicated, because the subsidy represents the core debate over the role of government and how tax dollars should be used. If federal revenue cuts continue, however, the debate over the role of government also will be answered: It will be to collect tax dollars to pay off the costs of programs it no longer can afford to provide.