A Believer In Tax Cuts
Last week Josh Bolten got a gift every budget director craves and this White House badly needs: a windfall. Tax revenues this year are projected to be up a surprising 14 percent over last year. The result should be a budget deficit some $94 billion smaller than the $427 billion forecast in February. Still, a $333 billion gap is no reason to pop champagne corks, critics say, and the real fiscal trouble begins three years from now when the baby boomers start retiring and stretching Social Security and Medicare to their breaking points. Regardless, Bolten and the White House were euphoric about the new number--it bodes well for the president's campaign promise to halve the deficit by 2009--and they give credit to the tax cuts that President Bush pushed through and that Bolten, as deputy chief of staff during Bush's first term, helped draft. The 50-year-old Harley-Davidson rider and bowling enthusiast spoke last week with U.S. News.
Is this new deficit number proof that the supply-side theory works, that tax cuts pay for themselves?
I don't think you need to either accept or deny that tax cuts pay for themselves to understand in this case that tax relief has triggered a solidly growing economy. It's because of that solidly growing economy that we're experiencing this upsurge in tax revenues, making it possible for us to close the budget deficit even more rapidly than we projected five months ago.
Can you identify where the increase in revenues occurred?
Economists will be examining for years the composition of income that yielded these higher-than-expected revenues. What we can say now is that we increased revenues from all major components: individual income taxes, payroll taxes, and especially corporate taxes.
How much of the improved revenue situation is one-time, and how much is permanent?
I don't think experts will know the answer to that for many months. We're experiencing this year an extraordinary increase in federal revenues, 14 percent, the largest in 24 years. We're not assuming that kind of revenue expansion going forward. Probably something closer to 6 percent.
Does this add fuel to the argument for making the tax cuts permanent?
It absolutely does. We project a continuing decline in our deficit through the next five years, down to a very low level, near 1 percent of [gross domestic product]. In order to do that, we need to keep a lid on spending and keep the economy rolling. Our economists believe and I believe that to do that we need to keep the tax cuts in place.
What happens when the baby boomers start retiring, though?
The numbers today make that picture better. The fiscal difficulty is not in the next decade but the succeeding one, when the baby boom generation is fully into retirement. We have huge unfunded liabilities--Social Security, Medicare, and Medicaid. Nothing we do with taxes or discretionary spending can alter the trajectory of those challenges. What we have to do is fundamentally reform the entitlement programs themselves. The president has started that process with his proposal on Social Security reform.
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