"Intellectual Dishonesty"

As of March 1, 2001, George W. Bush's approval rating was the lowest of any president at that point in his term for the last 50 years, according to The Economist. Bill Clinton's comparable rating was 63%, George H.W. Bush's was 76%. Dubya' s was 55%. And although Bush's rating improved slightly the following week, it declined again the week after that (according to a CNN/USA Today/Gallup poll taken March 9-11). People regarded Bush's handling of taxes, the economy, world affairs, and Social Security no better than his overall performance.

During his campaign, Bush promised a number of actions: reforming Medicare, privatizing Social Security, constructing a missile defense system, increasing spending for education, and cutting taxes. His recent speech to Congress sounded like he was starting to fulfill these campaign promises. Since then, while he has proposed increasing spending for education by 11.5% next year, most of the other proposals have fallen by the wayside.

He's sidestepped the issue of Social Security reform by foisting it on a commission that will merely postpone that political debate. Observers expect Medicare to be handled similarly. The Joint Chiefs of Staff have asked for $900 billion worth of new weapons which the Bush budget does not really include. Even a less comprehensive defense modernization is supposed to be paid for out of what has been called a $1 trillion "contingency", actually budgeted at only about $800 billion, half of which is supposed to be reserved for Medicare.

"The effect of tax reduction is not on the economy but on the pleasure and political gratitude of those who receive it."
-- John Kenneth Galbraith

With no political mandate, as evidenced by the polls cited above, Bush has staked his meager political capital on the tax cut. Yet viewed either from the perspective of the cost of the tax cut itself or assumptions about the surplus in the current economic context, the tax cut is not what it appears to be. In the words of Gerard Baker of the Financial Times "it is the intellectual dishonesty of this approach that is most distressing."

Tax cut in a nutshell:

Cost view:
Original meaning of $1.6 trillion tax cut: $1.3 trillion in actual tax cuts for 2002 - 2011, + $300 billion in interest charges because of higher national debt.
Current meaning of $1.6 trillion tax cut: Tax cuts alone for 2001 - 2011.
Budgetary cost of $1.6 trillion tax cut: $1.6 trillion + $400 billion in interest = $2 trillion
Other likely charges (not budgeted but probably unavoidable): $100 billion in mostly corporate tax breaks which are likely to be renewed.
Cost of ensuring that the alternative minimum tax does not interfere with a tax cut: $130 - $380 billion. (Estimate from the Brookings Institution, reported by The Economist).
Cost of backdating tax relief to the beginning of the year: $100 billion.
Likely actual cost of the $1.6 trillion tax cut: $2.1 - 2.6 trillion.
Surplus view:
10-year surplus according to the Bush budget: $5.6 trillion
Portion of surplus that cannot be used for anything except Social Security or debt reduction: $2.6 trillion
Portion of surplus that may be restricted in use to Medicare: $400 billion
Likely usable portion of surplus: $2.6 trillion
Less costs of tax cut and government operations: $0 - $500 billion (not the $1 trillion contingency)

What this reveals is that most of the budgeted surplus would be returned to taxpayers, leaving little money, if any, for other programs.

The Bush team claims that their assumptions about Gross Domestic Product (GDP) are conservative (what would they be?) so that the economic future could be better than predicted. Many observers regard their assumptions about government spending as extremely unrealistic, however. Despite an average increase in government discretionary spending of 6% over the last three years, and 9% last year, Bush plans to limit congressional spending to 4% next year, and hold it constant for the following decade. This represents an actual decrease in real per-capita spending, since it does not even allow for population increase.

Further, this spending level is supposed to include increases for Bush's priorities, such as education, which means that spending in other areas will have to be cut. But, as The Economist points out, "last year Republicans agreed to extremely tough overall spending figures, only to ignore them completely later on." With Republicans in control of congress and the White House, Mr. Bush won't be able to blame the opposition as he vetoes spending and threatens to shut down the government, as Mr. Clinton did.

During the campaign, Bush claimed that $1 trillion in tax cuts would be matched by $1trillion in new spending. As the analysis above shows, there is no real proposed increase in spending at all - in fact cuts will likely be required.

Who bears the brunt of the spending cuts:
The poor: Since they pay no income tax (although they do pay sales tax, gasoline tax, etc.) they will receive no tax cut, but bear the brunt of reduced service from government programs.
Middle income baby boomers: The highly touted $1600 per family with 2 children is mostly from an increased child credit rather than tax cuts. A couple with grown or college-age children receives $600. A widow or widower gets $300. In fact, the NY Times reports 88% of families will receive less than $1600.
Social Security and Medicare recipients: Bush plans to divert $1 trillion of the $3 trillion that Social Security and Medicare are expected to accumulate over the next ten years.

Expect the spin cycle to go into overdrive about how Social Security funds are still "in the system" even if they are in individual accounts, and how Medicare funds are still part of Medicare even if they're paying for prescription drug benefits. And expect political pressure to cut Social Security and Medicare benefits well before the programs themselves are in trouble early in the coming decade.

No surprise that the big beneficiaries of the Bush budget are the rich -- they mostly voted for Mr. Bush. Some observers have suggested, however, that Bush's return to voodoo economics threatens the very prosperity that brought them their wealth.

Clinton's determination to avoid deficit spending, and balance the federal budget, allowed the Federal Reserve to keep interest rates low. This combination of factors is generally credited with creating the economic climate for the greatest economic boom in American history. The Bush budget combined with unrealistic expectations about spending would likely bring the return of deficit spending and higher interest rates.

As we've pointed out elsewhere in The Dubya Report, the true conservative agenda behind the tax cut is to force a reduced role for federal government by making funds unavailable. This despite the fact, that federal spending as a share of GDP has shrunk by 20% over the last ten years.

The "intellectual dishonesty" Gerard Baker spoke of extends to claims that that tax cut will benefit the economy. According to John Kenneth Galbraith, historically tax cuts while politically popular have never been effective in stabilizing or supporting the economy.

Bush's tax cut is likely to be particularly ineffective since it primarily benefits the rich. Giving money to the rich in an economic downturn is not likely to stimulate the economy, since the rich are unlikely to increase their spending. Nor are they likely to invest or undertake new ventures in an environment of economic uncertainty. The expenditures of lower and middle income families are primarily for necessities, and are not likely to restart the economy, especially since they would not be the major recipients of the tax cut. In the words of John Kenneth Galbraith, "The effect of tax reduction is not on the economy but on the pleasure and political gratitude of those who receive it."


"Poll: Majority of Americans pleased with House tax cut vote" Cnn.com 12 Mar. 2001.

Galbraith, John Kenneth "Economic Delusion, Political Disaster" New York Times 11 Mar 2001.

Lewis, Anthony "The Golden Eggs" New York Times 10 Mar 2001.

"The great exploding tax cut" The Economist 7 Mar 2001.