NY Times Magazine, Sept. 14 2003 The Tax-Cut Con By PAUL KRUGMAN
1. The Cartoon and the Reality Bruce Tinsley's comic strip, ''Mallard Fillmore,'' is, he says, ''for the average person out there: the forgotten American taxpayer who's sick of the liberal media.'' In June, that forgotten taxpayer made an appearance in the strip, attacking his TV set with a baseball bat and yelling: ''I can't afford to send my kids to college, or even take 'em out of their substandard public school, because the federal, state and local governments take more than 50 percent of my income in taxes. And then the guy on the news asks with a straight face whether or not we can 'afford' tax cuts.''
But that's just a cartoon. Meanwhile, Bob Riley has to face the reality.
Riley knows all about substandard public schools. He's the governor of Alabama, which ranks near the bottom of the nation in both spending per pupil and educational achievement. The state has also neglected other public services -- for example, 28,000 inmates are held in a prison system built for 12,000. And thanks in part to a lack of health care, it has the second-highest infant mortality in the nation.
When he was a member of Congress, Riley, a Republican, was a staunch supporter of tax cuts. Faced with a fiscal crisis in his state, however, he seems to have had an epiphany. He decided that it was impossible to balance Alabama's budget without a significant tax increase. And that, apparently, led him to reconsider everything. ''The largest tax increase in state history just to maintain the status quo?'' he asked. ''I don't think so.'' Instead, Riley proposed a wholesale restructuring of the state's tax system: reducing taxes on the poor and middle class while raising them on corporations and the rich and increasing overall tax receipts enough to pay for a big increase in education spending. You might call it a New Deal for Alabama.
Nobody likes paying taxes, and no doubt some Americans are as angry about their taxes as Tinsley's imaginary character. But most Americans also care a lot about the things taxes pay for. All politicians say they're for public education; almost all of them also say they support a strong national defense, maintaining Social Security and, if anything, expanding the coverage of Medicare. When the ''guy on the news'' asks whether we can afford a tax cut, he's asking whether, after yet another tax cut goes through, there will be enough money to pay for those things. And the answer is no.
But it's very difficult to get that answer across in modern American politics, which has been dominated for 25 years by a crusade against taxes.
I don't use the word ''crusade'' lightly. The advocates of tax cuts are relentless, even fanatical. An indication of the movement's fervor -- and of its political power -- came during the Iraq war. War is expensive and is almost always accompanied by tax increases. But not in 2003. ''Nothing is more important in the face of a war,'' declared Tom DeLay, the House majority leader, ''than cutting taxes.'' And sure enough, taxes were cut, not just in a time of war but also in the face of record budget deficits. Nor will it be easy to reverse those tax cuts: the tax-cut movement has convinced many Americans -- like Tinsley -- that everybody still pays far too much in taxes.
A result of the tax-cut crusade is that there is now a fundamental mismatch between the benefits Americans expect to receive from the government and the revenues government collect. This mismatch is already having profound effects at the state and local levels: teachers and policemen are being laid off and children are being denied health insurance. The federal government can mask its problems for a while, by running huge budget deficits, but it, too, will eventually have to decide whether to cut services or raise taxes. And we are not talking about minor policy adjustments. If taxes stay as low as they are now, government as we know it cannot be maintained. In particular, Social Security will have to become far less generous; Medicare will no longer be able to guarantee comprehensive medical care to older Americans; Medicaid will no longer provide basic medical care to the poor.
How did we reach this point? What are the origins of the antitax crusade? And where is it taking us? To answer these questions, we will have to look both at who the antitax crusaders are and at the evidence on what tax cuts do to the budget and the economy. But first, let's set the stage by taking a look at the current state of taxation in America.
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6. A Planned Crisis Right now, much of the public discussion of the Bush tax cuts focuses on their short-run impact. Critics say that the 2.7 million jobs lost since March 2001 prove that the administration's policies have failed, while the administration says that things would have been even worse without the tax cuts and that a solid recovery is just around the corner.
But this is the wrong debate. Even in the short run, the right question to ask isn't whether the tax cuts were better than nothing; they probably were. The right question is whether some other economic-stimulus plan could have achieved better results at a lower budget cost. And it is hard to deny that, on a jobs-per-dollar basis, the Bush tax cuts have been extremely ineffective. According to the Congressional Budget Office, half of this year's $400 billion budget deficit is due to Bush tax cuts. Now $200 billion is a lot of money; it is equivalent to the salaries of four million average workers. Even the administration doesn't claim its policies have created four million jobs. Surely some other policy -- aid to state and local governments, tax breaks for the poor and middle class rather than the rich, maybe even W.P.A.-style public works -- would have been more successful at getting the country back to work.
Meanwhile, the tax cuts are designed to remain in place even after the economy has recovered. Where will they leave us?
Here's the basic fact: partly, though not entirely, as a result of the tax cuts of the last three years, the government of the United States faces a fundamental fiscal shortfall. That is, the revenue it collects falls well short of the sums it needs to pay for existing programs. Even the U.S. government must, eventually, pay its bills, so something will have to give.
The numbers tell the tale. This year and next, the federal government will run budget deficits of more than $400 billion. Deficits may fall a bit, at least as a share of gross domestic product, when the economy recovers. But the relief will be modest and temporary. As Peter Fisher, under secretary of the treasury for domestic finance, puts it, the federal government is ''a gigantic insurance company with a sideline business in defense and homeland security.'' And about a decade from now, this insurance company's policyholders will begin making a lot of claims. As the baby boomers retire, spending on Social Security benefits and Medicare will steadily rise, as will spending on Medicaid (because of rising medical costs). Eventually, unless there are sharp cuts in benefits, these three programs alone will consume a larger share of G.D.P. than the federal government currently collects in taxes.
Alan Auerbach, William Gale and Peter Orszag, fiscal experts at the Brookings Institution, have estimated the size of the ''fiscal gap'' -- the increase in revenues or reduction in spending that would be needed to make the nation's finances sustainable in the long run. If you define the long run as 75 years, this gap turns out to be 4.5 percent of G.D.P. Or to put it another way, the gap is equal to 30 percent of what the federal government spends on all domestic programs. Of that gap, about 60 percent is the result of the Bush tax cuts. We would have faced a serious fiscal problem even if those tax cuts had never happened. But we face a much nastier problem now that they are in place. And more broadly, the tax-cut crusade will make it very hard for any future politicians to raise taxes.
So how will this gap be closed? The crucial point is that it cannot be closed without either fundamentally redefining the role of government or sharply raising taxes.
Politicians will, of course, promise to eliminate wasteful spending. But take out Social Security, Medicare, defense, Medicaid, government pensions, homeland security, interest on the public debt and veterans' benefits -- none of them what people who complain about waste usually have in mind -- and you are left with spending equal to about 3 percent of gross domestic product. And most of that goes for courts, highways, education and other useful things. Any savings from elimination of waste and fraud will amount to little more than a rounding-off error.
So let's put a few things back on the table. Let's assume that interest on the public debt will be paid, that spending on defense and homeland security will not be compromised and that the regular operations of government will continue to be financed. What we are left with, then, are the New Deal and Great Society programs: Social Security, Medicare, Medicaid and unemployment insurance. And to close the fiscal gap, spending on these programs would have to be cut by around 40 percent.
It's impossible to know how such spending cuts might unfold, but cuts of that magnitude would require drastic changes in the system. It goes almost without saying that the age at which Americans become eligible for retirement benefits would rise, that Social Security payments would fall sharply compared with average incomes, that Medicare patients would be forced to pay much more of their expenses out of pocket -- or do without. And that would be only a start.
All this sounds politically impossible. In fact, politicians of both parties have been scrambling to expand, not reduce, Medicare benefits by adding prescription drug coverage. It's hard to imagine a situation under which the entitlement programs would be rolled back sufficiently to close the fiscal gap.
Yet closing the fiscal gap by raising taxes would mean rolling back all of the Bush tax cuts, and then some. And that also sounds politically impossible.
For the time being, there is a third alternative: borrow the difference between what we insist on spending and what we're willing to collect in taxes. That works as long as lenders believe that someday, somehow, we're going to get our fiscal act together. But this can't go on indefinitely. Eventually -- I think within a decade, though not everyone agrees -- the bond market will tell us that we have to make a choice.
In short, everything is going according to plan.
For the looming fiscal crisis doesn't represent a defeat for the leaders of the tax-cut crusade or a miscalculation on their part. Some supporters of President Bush may have really believed that his tax cuts were consistent with his promises to protect Social Security and expand Medicare; some people may still believe that the wondrous supply-side effects of tax cuts will make the budget deficit disappear. But for starve-the-beast tax-cutters, the coming crunch is exactly what they had in mind.
7. What Kind of Country? The astonishing political success of the antitax crusade has, more or less deliberately, set the United States up for a fiscal crisis. How we respond to that crisis will determine what kind of country we become.
If Grover Norquist is right -- and he has been right about a lot -- the coming crisis will allow conservatives to move the nation a long way back toward the kind of limited government we had before Franklin Roosevelt. Lack of revenue, he says, will make it possible for conservative politicians -- in the name of fiscal necessity -- to dismantle immensely popular government programs that would otherwise have been untouchable.
In Norquist's vision, America a couple of decades from now will be a place in which elderly people make up a disproportionate share of the poor, as they did before Social Security. It will also be a country in which even middle-class elderly Americans are, in many cases, unable to afford expensive medical procedures or prescription drugs and in which poor Americans generally go without even basic health care. And it may well be a place in which only those who can afford expensive private schools can give their children a decent education.
But as Governor Riley of Alabama reminds us, that's a choice, not a necessity. The tax-cut crusade has created a situation in which something must give. But what gives -- whether we decide that the New Deal and the Great Society must go or that taxes aren't such a bad thing after all -- is up to us. The American people must decide what kind of a country we want to be.
full: http://www.nytimes.com/2003/09/14/magazine/14TAXES.html
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