Clinton's Budget Plan: Hidden Tax Increases and Accounting Tricks

February 28, 1993|By DANIEL J. MITCHELL

President Clinton has proposed the biggest tax increase in U.S history as part of a $324 billion deficit-reduction package. He considers his plan to be "balanced" between tax increases and spending cuts. But new taxes and increases in existing taxes account for 74 percent of the total package, a net tax increase of $238 billion over the next four years. Projected spending cuts will generate just 16 percent of the savings, of $52 billion over four years.

That's not balance.

(The rest of the savings, 10 percent, will come from assumed reductions in federal interest payments of about $35 billion.)

The Clinton package marks a return to the failed tax-and-spend policies of the Carter administration. The deficit-reduction part of the package includes at least 53 separate tax increases, including an energy tax on the middle class that will force the average family of four to pay more than $1,200 over the next five years.

Of course the "rich" get hit, too. A new surtax would create a 40 percent tax bracket for all "millionaires" making more than $250,000 a year. All families making more than $140,000 (instead of the $200,000 Mr. Clinton originally promised) would see their tax rates rise to 36 percent from 31 percent. The so-called rich also would be an additional 2.9 percent Medicare tax on income above $135,000.

Finally, corporate America will have its tax rate raised, to 36 percent from 34 percent. Of course, this additional cost to businesses will simply be passed on to consumers in the form of higher prices.

All told, at least $38.7 billion of supposed "savings" in Mr. Clinton's budget package come from accounting sleight-of-hand that is counted as reductions in domestic spending.

Despite administration rhetoric heralding "a new era of integrity in the budget process," the Clinton budget doesn't even level with the American people on the size of the proposed tax increases.

At least 27 of Mr. Clinton's 53 tax increases are falsely classified as spending cuts. For example, increasing the share of Social Security benefits that are subject to taxation from 50 percent to 85 percent is called a spending "cut."

There are other accounting tricks, too. The budget magically assumes $1 billion of savings through better management of Veterans Administration hospitals; "other administrative savings" will generate $7.7 billion of deficit reduction; "streamlining government" allegedly will reduce spending by $7.9 billion; and more efficient tax collection by the Internal Revenue Service will somehow raise nearly $1 billion.

The administration also optimistically assumes it can save $11.5 billion by swapping high-interest, longer-term government debt for low-interest, shorter-term debt. But if interest rates happen to rise -- and they are now at 20-year lows -- this proposal actually will cost the government money.

These gimmicks are linked with other proposals in the plan that ** claim to save money by pushing spending into future years. Making Medicare payments to hospitals on a calendar-year basis, for example, does not change the federal government's liabilities, yet it is counted as a $4.6 billion spending cut.

Even more troubling, Mr. Clinton failed to point out that his supposed domestic cuts are offset by more than 131 proposals to increase domestic spending by a total of $127 billion. These increases in domestic spending exceed Mr. Clinton's proposed "cuts" over the next four years by a total of $24 billion. And when the budget gimmicks and phony cuts are excluded from the discussion, the net increase in domestic spending climbs even higher -- to more than $60 billion. All this new spending, incidentally, is in addition to the more than $200 billion of higher domestic spending already projected by government budget forecasts.

If Mr. Clinton has read his recent economic history, he should realize his plan may actually lead to higher deficits, not lower, because of Congress' propensity to spend every new penny of revenue generated by tax increases.

As a recent Joint Economic Committee report found, every dollar of higher taxes since 1947 has resulted in $1.59 of higher spending. And every tax increase of the past 12 years -- in 1982, 1984, 1987 and 1990 -- was followed the next year by an increase in the deficit, despite claims that the money would be used for deficit reduction. Nowhere in Mr. Clinton's plan are there any proposals or mechanisms to counter this propensity of Congress to spend tax increases on more government programs.

The Clinton plan is also overly optimistic about the amount of revenue it will bring in through higher taxes. The plan relies on a static model of the economy that assumes tax increases, including increases in marginal income tax rates, will have no impact on the behavior of taxpayers.

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