Fiscal Quagmire

Say this for the Bush administration: it will stick with a failed policy, come what may.

Article created by The Century Foundation.

The Bush administration has been better at starting policy initiatives and sticking to them than at finishing the job successfully. The war in Iraq is only the most salient of the failed policies that the administration is steadfastly pursuing.

On the economic front, the administration has launched one tax bill after another, all aimed at reducing taxes, especially on income from capital.

Unlike the war in Iraq, where every day brings news to families of the devastating human cost, the war on taxes is only preparing the ground for a harvest of economic problems. It may be years before the chronic build-up of national debt leads to flight from the dollar, high interest rates, and accelerating inflation, but that is where our fiscal policy is taking us.

Congress is now negotiating to approve tax cuts that will cost about $70 billion between 2006 and 2010. Some of these cuts, notably reform of the out-of-control Alternative Minimum Tax, are necessary. But other tax cuts that are likely to come out of the reconciliation process now underway in Congress are disastrously misguided. In particular, the plan to extend the huge tax breaks on income from dividends and capital gains only makes sense if the goal is for the federal government to borrow money in order to reward the very rich.

The Joint Congressional Committee on Taxation estimates that extending these tax breaks on income from capital would cost $51 billion over ten years. The Urban Institute-Brookings Tax Policy Center estimates that more than $45 billion of this tax break would go to households with income over $100,000 per year, and $27 billion of it would go to the 0.2 percent of households with income over $1 million.

But the real disaster of the administration’s relentless war on taxes is that the numbers just do not add up. If a bad tax—like the Alternative Minimum Tax—is cut, good policy requires that some other revenue source take its place (unless spending is cut). But the administration is proposing nothing but tax cuts, while it piles new spending on top of new spending. To the cost of the war on terror add the cost of wars in Iraq and Afghanistan and add the cost of hurricane relief and add the cost of the Medicare prescription drug law…all paid for by running up debt.

We cannot spend more and more money, cut more and more taxes, and carry on without looking where we are headed. The administration needs to tell us its fiscal exit strategy.