Craig Jennings is a policy fellow and Adam Hughes is director of federal fiscal policy at OMB Watch.
For the past few decades the federal government has been racking up massive amounts of debt without frightening away lenders thanks to a sterling reputation of debt repayment. Those days, however, may be gone as we stand at the precipice of the retirement of the Baby Boom Generation and our political leaders are increasingly unable to prepare for the impending crisis.
Today, as yet another fiscally irresponsible and reckless session of Congress winds down, we find ourselves confronting a half-trillion dollar war (so far); a massive, multibillion dollar Gulf Coast rebuilding effort; a looming energy crisis; a $260 billion deficit and an $8.5 trillion national debt. But the real challenges lay ahead, toward the obligations to this nation's citizens, and the magnitude of the problem should give even the most reckless of congressional members pause.
The solvency of the United States federal government will hinge on the financial decisions we make over the next decade, and we need wise and principled guidance to assign proper priorities and make hard choices. Yet this Congress is packed with supply-siders who continue to tell totally false fairytales about how tax cuts pay for themselves. It has skipped merrily down a sugar-coated path of tax cuts and delectable big-ticket giveaways to connected cronies.
In only five years, Congress and the Bush administration together have squandered a surplus that would have provided a much-needed buffer to gird against rapidly rising Medicare costs, a significantly smaller Social Security shortfall and unforeseeable emergencies such as war or natural disaster. Instead of acting as responsible stewards of the nation's finances and planning for future challenges, they opted to play politics with tax cuts by trying to give more breaks to those who need them least.
Recently, Sen. Judd Gregg, R-N.H., made a feeble attempt to cast the GOP as the party of fiscal responsibility by introducing a collection of failed budget-enforcement rules and backdoor mechanisms for cutting entitlement programs. Gregg's bill was nothing more than a political prancing pony to be trotted out to appease the GOP's conservative base around election time.
When the bill was rolled out, GOP leaders pontificated about fiscal responsibility and "getting the deficit under control"—the very same deficit they were responsible for creating. That this was nothing more than hollow rhetoric was demonstrated by Sen. Majority Leader Bill Frist, R-Tenn. Frist continued his obsession with gutting the estate tax—trying and failing three times to give the federal budget a $750 billion black eye and 18 super-rich families exactly what they have paid for.
It's almost as if Congress doesn't know how to fix the problem. A good first step would be to fully fund the Internal Revenue Service's appropriations request and beef up enforcement at the agency. A fully-funded IRS would be in much better position to close the "tax gap," thereby adding hundreds of billions of dollars to the Treasury. The "tax gap"—currently estimated at $345 billion annually—is the difference between what is owed in taxes and what is not paid. That's $90 billion more than this year's current deficit projection.
Simply by enforcing existing laws, the federal government could realistically eliminate the deficit. It makes absolutely no sense, then, that the IRS is moving in the opposite direction. As huge sums remain uncollected, the IRS has been consistently removing incentives for tax cheats to pay their dues. The "face-to-face" audit rate has declined 80 percent over the past 20 years—from 1.19 percent in 1984 to 0.15 percent in 2004 and IRS examination of business income-tax returns has dropped 66 percent since 1997.
Even more mysterious is IRS Commissioner Mark Everson's plan to lay off 157 of the 345 estate tax lawyers at the agency. Although Everson dismisses the idea these layoffs constitute a backdoor repeal of the estate tax, it hasn't stopped congressional Democrats from sounding the alarm. After all, estate tax lawyers are the most productive IRS employees, bringing in more than $2,000 in revenue for every hour worked.
Closing the tax gap could help balance the budget, but if there's anything that the Congress of 2001 taught us, it is that surpluses and balanced budgets are fleeting. A Congress intent on preserving the delicate balance necessary for fiscal responsibility should erect tall hurdles to stop would-be budget-wreckers. This will require structural changes to the process in Congress, the first and most important change being a reinstatement of pay-as-you-go (PAYGO) rules. In 2002, Congress abandoned this common sense and proven approach to responsible budgeting when it chose to let PAYGO rules expire. These rules mandate that any new increases in mandatory spending or reductions in revenue be matched by equally offsetting budget adjustments.
The last four years without PAYGO have shown just how important these rules are. Under PAYGO, Congress would move toward healthier fiscal policies by actually deliberating the efficacy of current spending and the potential returns of any new program. Likewise, Congress could not pass tax cut after tax cut without regard for the considerable cost to the country. Members of Congress would be forced to make the tough decisions that are part of their job and not function as an ATM to their well-connected friends and benefactors.
Bush and the GOP leadership in Congress have yet to embark on any serious attempts at controlling the hemorrhaging federal budget that would lead the country down a different path, away from the precipice of fiscal crisis. The president and his lap-dog Congress continue to play politics with the long-term fiscal viability of the U.S. government. Sticking with discredited fantasyland supply-side budgeting and refusing to employ new approaches and strategies available to restore budgetary discipline indicates a stubborn unwillingness to accept the reality of the fiscal problem facing the nation.
