Regardless of Bush’s Rationale, Tax Cut Could Invite a Fiscal Meltdown

Is George W. Bush deliberately trying to run up the federal deficit with the new tax cuts he signed into law last week?

That allegation is beginning to bubble up throughout Washington. Among critics, the theory is that Bush privately welcomes the record deficits -- up to $500 billion a year -- projected in the tax cut’s wake. The reason: The shortfalls could make it tougher for Democrats to advance new spending initiatives and create a climate more conducive to Bush’s calls for restructuring Social Security and Medicare.

The Financial Times of London started this ripple when it wrote recently that the most conservative Republicans would welcome a “fiscal crisis” that provides a justification for cutting spending. Liberal economist Paul Krugman then amplified the accusation in his New York Times column Tuesday.

Now some leading Democrats are joining in. Sen. Jon Corzine (D-N.J.), a former investment banker now on the Senate Budget Committee, says that while some Bush officials may have a supply-side faith that the tax cuts will pay for themselves through faster growth, he believes that “the ideologues in the administration” have a two-stage strategy: Engineer large deficits now and then use the red ink later to argue “for downsizing the role of government,” particularly by retrenching Social Security and Medicare.

Not surprisingly, the Bush team denies that. One Republican strategist close to the White House says Bush believes that his tax cuts are the best way to stimulate the economy, which would increase government revenue and eventually reduce the deficit. “This is not a hidden attempt to reduce spending,” says the strategist, who spoke on condition of anonymity. “It’s more simple; he thinks his plan will help the economy.”

This recalls the argument during Ronald Reagan’s presidency when critics -- notably the late Daniel Patrick Moynihan, then a Democratic senator from New York -- charged that the administration knew all along that Reagan’s 1981 supply-side tax cuts would open huge deficits. No one found a smoking gun to prove that charge, though enough conservatives defended the deficits as a way to “starve the beast” (in other words, de-fund the government) to keep the suspicion swirling.

It’s not much more likely that this dispute over Bush’s motivation will ever be entirely resolved. As Gene Sperling, director of the National Economic Council under former President Clinton, notes, there rarely is a single impetus for any major presidential policy. Many Bush officials may like the tax cut primarily because they think it will juice the economy. Others may want to starve the beast. Some may hope for both.

Yet whatever the motivation, what matters most is the effect. And whether deliberately or not, Bush is setting in motion forces that could produce a fiscal meltdown in the years ahead. “There have been a lot of analogies used, like ‘perfect storm,’ ‘train wreck,’ ” says Robert Bixby, executive director of the Concord Coalition, a nonpartisan deficit-watch group. “The depressing thing is they are all true.”

Three trends are converging to create this storm.

The first is the cost of the tax cut. Though Bush and Congress masked the true price tag by “sun-setting” almost all of the key provisions so they expire in the next few years, Treasury Secretary John W. Snow has already indicated that the administration will seek to make those reductions permanent. If all the new cuts are extended, the bill’s 10-year cost soars from the official $320 billion to about $1 trillion.

And that comes on top of the $1.35-trillion, 10-year tax cut Bush signed into law just two years ago. Combined, these tax cuts will reduce federal revenue by roughly $400 billion a year by 2013 -- just as the second trend kicks into high gear.

The second trend is the retirement of the baby boom generation. As baby boomers go gray, the number of senior citizens in America will increase by about half over the next 20 years. That means big new bills for retirement programs. Today, Social Security, Medicare and Medicaid (which helps fund nursing-home care for low-income seniors) consume about 7.5% of the gross national product; by 2015, that will rise by one-third.

To help bear that burden, Clinton wanted to use the surplus temporarily accumulating in Social Security to pay off the publicly held national debt. That would have allowed Washington to shift the $200 billion it now pays in annual interest on the debt to funding for the boomers’ retirement.

Terrorism, war and recession probably doomed the prospect of entirely eliminating the debt. But the cost of Bush’s tax agenda has compounded the problem. The huge deficits forecast after the latest tax cut mean that, rather than paring the debt, the government will be forced to borrow up to $500 billion annually.

Thus trend three: a rising national debt that some analysts say could double by 2012. By paying off the debt, Clinton had hoped to eliminate federal interest payments by about 2008. Stan Collender, a budget expert at the public affairs firm Fleishman-Hillard in Washington, now estimates that, as all the new debt accumulates, interest costs by then will instead soar to $350 billion a year.

Which means that by decade’s end, the baby boom will present its children with the bill not only for its retirement, but the debt it ran up in voting itself, as today’s highest earners, a series of huge tax cuts.

Hey, thanks Mom and Dad!

Faster economic growth, as the Bush camp argues, could relieve some of this strain. But even the administration doesn’t imagine growth alone can solve the problem.

Bush’s own long-term budget estimates show deficits persisting for decades; in the short term, his economic team has calculated that even if the economy is running at full tilt, the deficit will remain at nearly $200 billion a year through 2008.

They will be lucky if the damage is nearly that small.

One of Bush’s best defenses against the charge of engineering deficits to shrink government is that he’s still proposing new spending, particularly a big prescription-drug plan for seniors.

Yet, amid tax cuts, that will only enlarge the debt looming over the next generation. Future taxpayers may never agree whether Bush amassed that debt by accident, design or indifference, but they will feel its crushing weight all the same.

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Ronald Brownstein’s column appears every Monday. See current and past Brownstein columns on The Times’ Web site at: www.latimes.com/brownstein.