Where's our $4 trillion?

April 30, 2002

ALONG, LONG time ago -- in a far gentler and much richer time -- we appeared to be rolling in dough. We seemed to have reached a fiscal Promised Land, where we drank deeply of a collective vision of escalating federal budget surpluses piling up mountains of cash year after year. Heady with anticipation, Congress passed a sweeping tax cut plan, putting $1.35 trillion back in our pockets through 2010. Lower tax rates, new tax credits for children and education, no estate taxes. Way back then, we could afford it all.

Actually, that was just a year ago.

And what a difference a year makes -- a year that brought the burst of the stock market bubble and a slowing economy, Sept. 11 and a rise in defense spending with no immediate end in sight, the first of those tax cuts and a fall-off in government revenue growth.

Clearly, we aren't in Kansas anymore. In fact, after four years of budget surpluses, we're back onto all too familiar fiscal ground -- the land of deficits. This year's projected federal budget surplus has become a growing shortfall. So has next year's, and it wouldn't be a surprise if the deficits were to continue for a while thereafter.

For the period 2002 to 2010, the cumulative $5.6 trillion surplus anticipated just a year ago is now projected to be $1.6 trillion -- and falling. The other day, with Congress failing to raise the legal ceiling on the national debt, the government had to pull a sleight of hand to stay in business, temporarily borrowing from the federal employee retirement system.

Nothing like the disappearance of 4 trillion bucks or more -- at least on paper -- to ensure that the politics of taxes will afflict us for a long time. That flood of money was to be devoted to lowering the national deficit, thereby "saving" it to later buttress Social Security when that program's expenses begin to outstrip its income around 2016. (It now appears that, instead of being put away in a so-called "lock box," Social Security surpluses will continue shoring up the federal budget.)

So as the fall mid-term congressional elections take shape, Democrats and Republicans alike are vowing that taxes -- and Social Security -- will take center stage. That was guaranteed this month when the Republican-controlled House voted to extend last year's tax cuts beyond 2010, while the Democratically controlled Senate balked.

Republicans now can claim the Democrats "approved" the largest tax increase in history, the one that would occur if the Bush tax cuts were to expire in 2011. And Democrats can claim Republicans are jeopardizing Social Security. Call it a face-off over who blew the $4 trillion. (The Congressional Budget Office says most was lost because of Capitol Hill spending and tax cutting.)

There you have it. It's hard to argue against paying less in taxes. It's hard to argue against shoring up Social Security. With last year's tax cuts, President Bush has already accomplished the first goal, at least through 2010. But simple prudence -- not to mention the second goal, sustaining Social Security -- means that acting now to extend these cuts beyond 2010 is irresponsible.

The original reason the Bush cuts expire at the end of 2010 is a sunset provision for Senate financial bills extending beyond the 10-year window of congressional budgets. If nothing else, the past year underscores the wisdom of not relying on financial projections that far out.

At the same time, one of the most compelling reasons for acting now on taxes has to do with personal financial planning. Right now, the sudden expiration of some of the Bush tax cuts -- particularly the estate tax, abolished for one year (2010) before reverting to 55 percent the next -- inordinately complicates planning. Same with the new education tax credits. These should be among the first measures that Congress considers separately.

But now is not the time to extend any of last year's tax cuts. That would look like a much better idea if we had somehow continued to reside in last year's financial nirvana. Maybe we'll wake up in that sweet spot again. Maybe not. We don't know. That's the point.

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