GIVE IT BACK NOW

The Wall Street Journal, June 30, '99
Editorial

The news this week is that even President Clinton can no longer deny that Washington has been taking excess taxes from the American people. But he still doesn't want you to know that he's fighting ferociously to hold onto as much of that excess as possible, for spending programs that make taxpayers dependent on Washington.

This is the big political picture behind Mr. Clinton's plan this week to deal with the "surprise" federal budget surplus of some $3 trillion over 10 years, a mere $1 trillion over five. For some of us, this is no surprise at all. Supply-side economists, notably Steve Moore and Larry Kudlow, have been predicting this revenue cascade for two years. The White House denied the flood as long as possible, in our view to fend off calls for tax cuts.

But now that the facts are obvious, Mr. Clinton has joined the game with proposals to do everything but cut taxes. Indeed, he is proposing a new entitlement binge unseen since the 1960s. What makes it so Clintonian - that is, slyly dishonest - is that he wraps it all in the political disguise of "fiscal discipline" and "freeing our nation from the shackles of debt." In fact, he is proposing to do the opposite.

The Debt Scam

Start with the poll-derived promise that the feds will somehow "reserve" most of the surplus for Social Security. Unless Americans are given personal accounts with property rights to the FICA taxes they pay, this is a fiscal fiction. There is no Social Security "lock-box" that somehow can't be raided by politicians.

All tax revenue - income, FICA, other - flows into the general Treasury and is either a) spent this year, or b) used to pay off federal debt as it comes due. The pattern so far in this new surplus era is that politicians in both parties find ample ways to do the first, so that each year's surplus turns out at the end to be smaller than advertised.

Last year, Rep. Bud Shuster (R., Pa.) laid claim to hundreds of billions for highways, and this year he's back at the trough for aviation. Senators Pete Domenici and Bobby Byrd recently staged a mini-raid on the surplus to subsidize steel and oil and gas companies - only hours after the Senate voted for its version of the "lock-box." So much for the White House talking points that boast of "tough protections, including maintaining the pay/go rules" that require 60 Senate votes to overrule.

But even the surplus that does survive to pay down debt does nothing for Social Security. Repaying debt doesn't reduce federal pension liabilities by one penny. The Baby Boom's retirement is still going to have to be paid out of federal revenues collected in the years when they retire.

It's true that a smaller national debt reduces federal interest costs, as if that money would be spent on better purposes. But the national debt is already falling so fast as a share of the U.S. economy that it is economically irrelevant. It has almost zero effect on interest rates, contrary to Mr. Clinton's claims. The only virtue of debt reduction is that at least the money isn't being spent by Bud Shuster.

The Medicare Trojan Horse

In any event, Mr. Clinton is proposing new entitlements that will absorb any surplus long after he's left office. There's "a new $156 billion children's and education trust fund." Then there's $540 billion for "USA Accounts," which the White House advertises as a tax cut but are really another way to redistribute income to politically favored constituents. They let politicians keep tax rates higher than they need to be so pols can take credit for doling out annual cash grants to swing-vote soccer moms.

But the really Big Bribe is Mr. Clinton's promise of free prescription drug coverage for the elderly. We are talking here about the largest entitlement expansion since Medicare itself in 1965. Yet White House economics aide Gene Sperling actually said Monday that this "will not have a large cost." And the President did not have sex with ...

The entire history of entitlements is that their spending explodes with what economists call "moral hazard." This is especially true for drug therapies that are increasingly available for "life-style" choices, such as Viagra. The tab is going to be hundreds of billions of dollars by the time the Baby Boomers retire.

The real political outrage here is that seniors would already have drug coverage if Medicare weren't a Soviet-style bureaucracy. The private insurance market for younger Americans has adapted to the changes in medicine since the 1960s to cover advances in pharmaceuticals. But Medicare responds only to political (not market) incentives. And instead of reforming Medicare to change with the times, liberal Democrats have made it more bureaucratic by imposing price controls on the services it does cover.

Despite denials, Mr. Clinton is now proposing to turn drug coverage over to the same Health Care Financing Administration bureaucracy. That means, inevitably, price controls on drugs - another of the liberals' longtime holy grails. And that means turning drug companies into utilities, with regulated profits that will reduce the incentives for R&D and thus for new, miracle drugs. Republicans should kill drug coverage that doesn't include Medicare reform as a threat to modern health, the same way they did HillaryCare.

Cut Taxes - A Lot

Which brings us to the only real political response likely to prevent this Beltway money grab - a really big tax cut. Republicans should stop tinkering around the edges and return the U.S. tax burden to normal peacetime levels. The best economic bang for the buck would come from reducing marginal income tax rates by 20% at least across-the-board. This also has the huge moral advantage of returning the money to those who earn it, rather than those most successful at Washington deal-making. Happily, potential Republican presidents on the stump are gravitating to this ideal.

Given the current Congressional realities, though, there remains the immediate imperative of keeping politicians from grabbing the surpluses. In this spirit we'd support any bona fide tax cuts. We like the plan of Senators Paul Coverdell and Bob Torricelli to raise the income threshold for the 15% rate, for one. A huge expansion of the Roth IRA, including the repeal of income limits, would open a backdoor route to a consumption tax. Death taxes help to ruin small businesses and deserve to be slashed, and do ultimately impose high marginal rates.

We'd also encourage Senators Joe Lieberman and Orrin Hatch to return to the capital-gains gold mine. According to a new study by David Wyss of Standard & Poor's DRI, their 1997 capital-gains cut to 20% was a big economic winner. Mr. Wyss, who is no conservative, estimates that the cut will raise net business investment by 1.5% a year. He also figures it's responsible for about one-fourth of the 30% increase in stock-market prices since the law passed.

The broader point here is that it's time for tax cutters to throw deep. If they don't, the surplus will stay in Washington forever and the main achievement of the Republican Congress will have been to make the era of big government permanent.

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