The Detroit News

August 23, 2001, Thursday

SECTION: Editorial; Pg. 14

Don't Blame Bush Tax Cuts for Declining Budget Surplus

by The Detroit News

The White House revealed figures this week confirming that the budget surplus at the end of this fiscal year will be smaller smaller than expected.

Congressional Democrats are seizing on this news to argue that President George W. Bush's tax cuts were fiscally irresponsible and have contributed to this situation.

But such claims misdiagnose the situation: It is the slowing economy, coupled with an increase in congressional spending -- not the tax cuts -- that are responsible for the diminishing surplus. The White House's Office of Management and

Budget said the surplus for the 2001 fiscal year ending in September will be about $160 billion. Although this is still the second largest surplus in history (last year's was the largest), it is about $125 billion less than what was previously projected.

But because all the surplus stems from extra Social Security receipts, Democrats argue that Bush will have to raid the Social Security Trust Fund to finance new government programs. This would not have been necessary, they claim, hadBush not insisted on his tax rebates this year.

But such claims are disingenuous at best.

Congress has been raiding Social Security's so-called Trust Fund forever. The Trust Fund is nothing more than an accounting mechanism whose extra proceeds have historically been spent on all kinds of government programs.

Congress is now promising to use this surplus to retire the national debt. This will certainly be a better use of the money. But either way, the money will not stay in the Trust Fund for the benefit of future retirees.

It is true that the tax rebate President Bush signed into law will cost about $38 billion this year. But forecasters formed their original surplus expectations after taking into account the final tab for the rebate. If the projected surplus has not materialized, it could not be attributed to the tax cut.

The real reason why federal revenue is no longer gushing is that the economy has slowed even more than expected. It is precisely to jump-start the moribund economy that the Federal Reserve Board Tuesday cut short-term interest rates -- for the seventh time this year -- on loans that banks charge each other on overnight loans. The hope is that this will make it easier for industry to borrow capital and begin expanding again.

Broad-based tax cuts, just like lower interest rates, will have the same effect. They will take money out of Washington's pockets and put it in the hands of people who can spend it much more efficiently. As Stephen Moore, president of the Washington-based Club for Growth, notes, "a tax-rate cut increases the after-tax rate of return on capital investment, starting a business, on saving and on working."

One could fault President Bush for not pushing for even more aggressive tax rate cuts in the face of the weakening economy. But his 10-year tax cut package, plus the Federal Reserve's rate cuts, will be some help to stimulate the economy and pump up federal revenues -- and they keep Congress from spending the money.

The Issue

Is President Bush's tax rebate responsible for the reduction in this year's projected budget surplus?