Hoist By His Own Petard: OMB Report Says Tax Cut Eliminates Surplus

Harry Truman must have turned over in his grave, as Dubya tried to invoke the Truman "plain speaking" legacy in defending his tax cut and budget in an August 21 speech at Independence, MO, Truman's home town. Truman is famous for his motto, "The buck stops here." C student that he is, Bush only got it 75% right. Given the economic slowdown and the tax cut, Bush's motto could be "The bucks stop." In his speech Bush attempted a pre-emptive strike against critics of his fiscal policy, saying, "... tax relief is important to make sure our economy grows.... The biggest threat to our recovery is for the Congress to overspend." The Office of Management and Budget (OMB) report issued August 22 documents that the tax cut and reduced revenues have essentially eliminated any surplus beyond what belongs to Social Security, however. This includes the diversion of Medicare-specific payroll taxes to cover Medicare supplementary health insurance normally funded by subscriber fees and general revenue. The OMB report lists several programs that will require "provisions to offset the costs" -- in other words, for which there is no money in the budget. These include the restructuring of farm programs, tax credits that expire this year such as the welfare-to-work credit, and provisions for natural disasters. Democrats suggested that the OMB report supported their contention that funds do not exist for administration proposals such as Social Security private investment accounts, increased spending for education, or the missile defense system. Senator Robert Byrd, chairman of the Senate Appropriations Committee, said "The administration needs to take a look in the mirror and get a clear view on who has done and who is doing this spending. He's the chief spender, hands down,"

Democrats were also quick to point out the inappropriateness of Bush attempting to co-opt Truman's legacy. Truman was a major proponent of Franklin Roosevelt's New Deal, which established federal social programs philosophically anathema to many conservatives. In his 1949 State of the Union address Truman proposed increasing Social Security benefits, especially for the elderly, and establishing "a system of prepaid medical insurance which will enable every American to afford good medical care." Truman was also a staunch opponent of supply-side economics, saying in the same speech,

We have abandoned the "trickle-down" concept of national prosperity. Instead, we believe that our economic system should rest on a democratic foundation and that wealth should be created for the benefit of all.

Senator Byrd was among the Democrats suggesting that Bush's proposed increases in defense spending were likely candidates for cuts, saying he didn't have "a modicum of confidence" in the "scientific effectiveness" of the missile defense plan, and that "it is very unwise for Congress to lend its support." Ridiculing the mantra Bush often repeats to audiences of his political speeches that tax refunds are "your money," Byrd pointed to the diversion of Medicare payroll taxes to pay for Medicare supplemental insurance, and the accounting restatement of $4.3 billion of Social Security taxes as general funds. "That Social Security trust fund is your money, quote closed quote," he said. "Medicare is your money, quote closed quote."

When the Department of the Treasury announced in early August that, rather than retire $57 billion in public debt they intended to borrow $51 billion, largely to finance the current-year portion of the tax cut, the Economist presciently warned,

What Mr Bush cannot do is continue to claim that America can have a tax cut, a budget surplus and big new spending programmes all together. The official figures for this year will still show a surplus of $160 billion; but, if you remove the surpluses for Social Security and Medicare, which the administration is not supposed to touch, it will almost certainly be in deficit. Revealingly, officials now call the Medicare surplus an accounting phenomenon.

Whatever the exact definition of the surplus, it is far too small to finance all the president's projects. Military planners are up in arms (you might say) about the lack of money for new weapons such as an anti-missile shield. Nor will there be money to extend Medicare
benefits to cover prescription drugs. Whether or not the budget is in the red, the politics of budget deficits is back.

Now that the OMB has validated the numbers, observers from a variety of political points of view have suggested that the political importance of "tapping" Social Security and Medicare funds in the short term is greater than its economic importance. Social Security or Medicare surpluses are always used for other purposes, and IOUs placed in the trust funds. If the surpluses are used to pay down debt, they can be considered to be "saved" to finance retirement benefits in subsequent years. Otherwise, they can be used for other federal programs -- defense, education, etc. In either case, the IOUs are placed in the trust fund, so the effect on Social Security and Medicare is the same.

The more serious question, these observers argue, is whether the Bush tax cut over the long term will leave enough revenue to cover the cost of operating the government. The administration's figures that show surpluses over a 10 year horizon are deceptive, and were arrived at using a number of false assumptions:

  • Deep cuts in domestic programs are assumed (which neither party is likely to actually support).
  • Proposed defense expenditures have no offsetting revenue component
  • No expenditures to support farm programs, Social Security, Medicare, or a prescription drug plan are accounted for.
  • The cost of the tax cut is stated as $1.3 trillion when it is likely to actually cost closer to $4 trillion, including finance charges and all its provisions.

In its recent economic review of the United States, the International Monetary Fund (IMF) warned that the cost of the tax cut would likely be higher than anticipated, and recommended "that spending increases and multi-year tax cuts should be implemented flexibly so as to ensure that there will be sufficient resources over the medium term to finance these measures."

Flexible implementation could mean what some in congress have referred to as "triggers," where provisions of the tax cut only go into effect if economic conditions support them. Or they could mean reversing some components of the tax cut altogether.

Rep. John M. Spratt Jr., senior Democrat on the House Budget Committee, and Gene Sperling, President Bill Clinton's chief economic adviser, in a news conference shortly after the Bush speech, suggested that the proposed $33 billion increase in defense spending had exacerbated a budget process that was unrealistic from the outset. House minority leader, Richard Gephardt, responded to Bush's contention that Congressional spending threatened economic recovery, saying "If that's true, he should prevail upon the House Republican leadership to pass a new budget and reevaluate all the appropriation bills."


"Text: Bush on Budget" 21 Aug. 2001

Goldstein, Amy "Bush Backs Tax Cut, Blames Congress President Deflects Attacks From Democrats Over Shrinking Budget Surplus" 22 Aug. 2001

Kessler, Glenn "Byrd Issues a Warning on Shrinking Surplus" 22 Aug. 2001

Stevenson, Richard W. "Citing Drop in Surplus, Democrats Plan to Portray Bush as Reckless" 21 Aug. 2001

"The Wrong Scoreboard" Editorial. . 21 Aug. 2001.

"Please sir, the dog ate my surplus" Economist 2 Aug. 2001