"Deficit Reduction" as Magic Trick


The recent budget deal announced by the White House and Congress shows that the so-called Republican revolutionaries have learned the secret of governance: Pay lip service to shrinking the government while working with your sworn enemies toward expanding it.

After receiving a $225-billion windfall in projected tax revenues as a result of unexpectedly strong economic growth, congressional Republicans cut a deal that let supporters of big government lock in real gains.

The deal includes a massive new entitlement for child health care, an expansion of welfare benefits for noncitizens and yet another welfare-to-work tax credit, none of which have been successful.

In exchange, congressional leaders secured ephemeral reductions in entitlement spending, such as an assumed $115 billion savings in Medicare from price controls, and a promise of $85 billion in tax reduction over five years, a mere 1 percent of the government's expected $8 trillion take.

The deal is a typical Washington sham. Of the $ 350 billion in deficit reduction, less than 1 percent comes from actual policy changes, Sen. Phil Gramm remarked (R.-Texas). Ninety-nine percent of the deficit reduction is assumed. "This is like having a crisis in your family budget and assuming that you are going to win the lottery," Gramm said recently.

Gramm's pillorying of the deal is refreshing and necessary. But the problem lies as much in the Republicans' goals as in the specifics of their capitulation to President Clinton.

Even if the deal wasn't a sham, it would be poison because it underscores Washington's fixation with targeted tax cuts–behavior modification via the tax code–rather than broad-based tax simplification and rate reduction.

This infatuation with social engineering on the cheap unmasks the true beliefs of Washington's political class, who think they know how to spend taxpayers' money better than we do.

Consider the presumed $85 billion in tax cuts. President Clinton managed to secure $35 billion (roughly 40 percent of all tax savings) for a college-tuition tax credit. While the initial costs of college tuitions and fees are expensive, the higher lifetime earnings of those who get a college education may lower the real, long-term costs of higher learning.

Furthermore, because the potential supply of full-time college students is more or less fixed in the short run, a tuition tax credit would allow colleges to increase tuitions.

Students and their families wouldn't notice the higher costs initially because they could simply write them off on their 1040 tax forms.

What about the other 60 percent, the $50 billion in tax cuts that Congress has to play with? The bulk of it will go to a $500-per-child tax credit.

This may be good politics, but like so much that Washington churns out, it is destructive policy. Sen. Gramm points out that, if applied to everyone, the tax credit would have originally cost the Treasury $105 billion over five years.

Since Congress only has $50 billion in its fiscal sandbox, any per-child tax credit would have to target either lower-income families alone or be cut off before children reach age 18.

This tax credit would also compete with (and likely rule out) popular alternatives like abolishing the inheritance tax or cutting taxes on capital gains. But even if money abounded, the per child tax credit is bad policy. Since it is a lump-sum payment, it would not lower tax rates.

The economic case for tax cuts is that people tend to work harder and earn more when the government takes less of their paychecks. Since this tax cut would not reduce marginal rates, any dynamic economic benefit would be small.

Make no mistake: All families–young childless couples, families with older children, empty nesters–need and deserve tax relief. But it should come from lower tax rates and a simplified tax code.

The per child tax credit is pernicious because it will take its place next to the home-mortgage deduction as a barrier to reconstituting the tax code.

Summing up the situation, Deputy Treasury Secretary Lawrence Summers said recently, "This is not the 1980s."

And he is right. In the 1980s, there was an articulate voice in Washington arguing for tax cuts, not because they were useful in directing people's behavior but because people have an inherent right not to be directed.

Ronald Reagan fought for tax cuts–not to bribe 18-year-olds into college classrooms or to secure the votes of soccer moms–but because individuals have a right to spend their own money. When they do so, we all prosper.