The Balanced Budget Shell Game
Chicago Sun Times, August 2, 1997
Balancing the budget has generally been a pretext for doing bad things, and we have become accustomed to a lot of hype around the issue. But yesterday's agreement between the Clinton Administration and Congressional leaders sets new records for hypocrisy and duplicity. Perhaps this is what President Clinton meant when he said it could be "the achievement of a generation."
First they negotiate a deal that may or may not reduce the deficit-- it depends on whether you believe that the spending cuts scheduled for later years will actually happen, not to mention other dubious assumptions. They call this a "balanced budget" deal, and then both sides claim that they had to give away the store in order to get the other side to agree to a balanced budget.
Will they get away with it? So far, the architects of the deal are basking in the warm sunlight of bipartisan cross-congratulation. But that could change as more of the facts of the matter begin to sink in.
One of these facts is that the budget has practically balanced itself already, thanks to six years of steady growth. The latest deficit projections for fiscal year 1997 have come in at $30 billion, which may sound like a lot of money but really is a pretty small fraction-- not even half a percent-- of our national income. And it is not clear whether the magic number zero, which is meaningless economically but has taken on a special significance in the world of political numerology, would actually be reached faster with the budget deal or without it.
So they didn't need the deal to balance the budget, but it makes nice cover for showering huge tax breaks on the undeserving rich. Chief among these is the capital gains tax, which is lowered from its current top rate of 28% to 20% for assets held at least 18 months. A fine sense of fairness these folks have: Bill Gates can now sell a chunk of his $40 billion fortune, make $10 billion in capital gains, and pay a lower income tax rate than a nurse making $35,000 a year.
But the spirit of bipartisanship did not stop there. Seized by the euphoria of giving, the "budget balancers" decided that if you hold your assets for more than five years, the rate falls to 18%. This little bonus would give Gates, in the above example, an extra $200 million. It is difficult to interpret the 18% rate as anything other than a gift. Is anyone prepared to argue that an investor will actually hold an asset for an additional three and a half years, just to get those 2 percentage points?
Treasury Secretary Robert Rubin described the tax cuts as a "kind of dividend, for good national economic performance." Hello? Hasn't he noticed that the stock market has doubled in the last two years? Isn't that enough of a reward for the rich?
For the rest of us, the budget deal provides a few crumbs, but what is given with one hand is mostly taken away with the other. There will be funding for the states to insure a fraction-- it's not clear how many, but definitely less than 25%-- of the nation's uninsured children. But this must be weighed against the Medicare and Medicaid cuts. The latter will reduce payments to hospitals that have a lot of poor patients, who will suffer as a result. The $115 billion cut from Medicare includes a lot of justified reductions in payments to HMO's and other providers that are reaping enormous profits off the government. But it will also cause reduced and denied services, as well as higher co-payments, for many senior citizens.
The tuition tax credits are nice, but they won't be given to the millions of low income families and individuals that need them the most. When you add it all up, even with the child tax credit, the bottom 40% of taxpayers will get nothing from the deal. According to a preliminary analysis by Citizens for Tax Justice, the top 1% of taxpayers (with an average income of $650,000) will get 36% of the tax breaks, or about $17,000 each.
Few economists would venture to claim that these tax breaks will stimulate economic growth. Nor is there any credible evidence that balancing the budget, regardless of how it is accomplished, will have any significant positive effect on the economy. The real legacy of this budget deal will be its contribution to income inequality, in which the United States now has the lead among the developed nations of the world. This agreement will ensure that we keep that title for many years to come. Is this what our political leaders are celebrating?
Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of the forthcoming book Failed: What the "Experts" Got Wrong About the Global Economy (Oxford University Press, 2015).