To cut or not to cut -- the fiscal conservative's question

By W. James Antle III
web posted January 10, 2005

Economic conservatives have entered the New Year in a
precarious position. Two of their signature items, Social Security
reform that would transform the program from a massive
entitlement into an engine of private wealth creation and tax
reform that would make the internal revenue code less biased
against savings and investment, loom large on the Bush
administration's second agenda. But the political feasibility of
these plans is uncertain and conservatives are divided over the
exact form they should take.

In theory, free-marketeers should find both big-ticket items easy
going. With more than half of U.S. households now invested in
the stock market, polls over the last decade have shown
Americans becoming increasingly supportive of diverting payroll
tax revenue into personal investment accounts. The public is
similarly sympathetic to the goals of tax reform, regarding the
current tax code as too time-consuming and complex, and would
likely become more so if it was conducted in a manner that left
taxes lower in general.

But just because the public endorses the general principles
behind these reforms doesn't mean they will embrace the details
over whatever program emerges in Washington. A decade of
debate has succeeded in teaching large segments of the
electorate that Social Security is a pay-as-you-go system with a
fictitious trust fund. Today's workers actually finance the benefits
for current retirees. Shifting some of the money that would
otherwise pay for retirees' benefits into personal accounts for the
workers, however, would create what Beltway lingo describes
as transition costs. Entitlement reformers, who rely heavily on
their cachet as innovative good-government types, have been
slow to come up with publicly accessible arguments about where
this money is going to come from.

Nor is tax reform necessarily an easy sell once you are dealing
with an actual bill rather than just broad concepts. In order to
clean up the tax code and keep any marginal-rate cuts revenue-
neutral, certain deductions that powerful special interests or even
the general public will like may end up on the chopping block. If
the eventual legislation doesn't include any offsetting tax cuts, the
voters may not have any reason to support it. If it does contain
tax cuts, it will open up political arguments about fairness --
usually a shouting match over what percentage of the tax cut will
go to that famous top 1 percent - and the budget deficits. The
president has appointed a tax-reform commission to be chaired
by former Sens. Connie Mack (R-Fla.) and John Breaux (D-
La.), but the recommendations of the last such commission,
headed by Jack Kemp, went nowhere.

While President Bush's previous tax cuts have been a net benefit
politically (as well as economically), they have not come without
costs. A sizeable portion of the electorate agrees with the
Democrats that these cuts have contributed to the deficit and
unacceptably increased the national debt. Outside of supply-side
circles, the tax cuts don't seem to be given much credit for easing
the economy out of recession. Even though most economic
indicators have improved since the lower rates on labor income,
dividends and capital gains have taken effect and 2.5 million new
jobs have been created since August 2003, there appears to be
a greater sense of foreboding about family financial prospects
than during the peak of the boom that followed the Reagan tax
cuts.

Fiscal conservatives have cluttered their message of safeguarding
taxpayer money and responsibly restraining government with a
high tolerance for borrowing and public debt. Many voters no
longer see the distinction between conservative Republicans and
liberal Democrats as a debate over whether they will be allowed
to keep what they earn; instead, it is seen as a semantic argument
between the Democrats' tax-and-spend versus the GOP's
borrow-and-spend.

Indeed, economic conservatives were a less important part of
Bush's reelection than conservatives concerned about moral
issues or anti-American terrorism. Tax cuts are popular, but less
salient than when the top marginal income-tax rate was 70
percent and the economy was clearly being strangled by
stagflation. And it's possible that voters will perceive Social
Security reforms as being less fiscally responsible if they rely too
heavily on an increase in short-term borrowing.

This last point has triggered a debate among Washington fiscal
conservatives themselves. The White House is said to be
considering price indexing, under which Social Security benefits
would rise at the rate of consumer prices rather than wages. This
would allow benefits to keep pace with inflation, but payments
today's workers might be as much as 40 percent lower than
what they would be under wage indexing.

Price indexing would promote the long-term solvency of Social
Security while offsetting the short-term transition costs created
by personal accounts. It also might help reformers pass much
larger personal accounts than would be politically possible if the
transition costs were entirely covered by borrowing.

The bright side is that it would be much harder for opponents to
paint Social Security reform as a risky scheme that will have to
be paid for by our children and grandchildren. If the short-term
transition costs of personal accounts are paid entirely by
borrowing, it is much more difficult to make the case that they
are part of a fiscally responsible effort to ensure the system's
solvency.

But the political risks of price indexing are daunting. Instead of
raising the specter of reckless borrowing, reform opponents will
be able to rail against benefit cuts. Conservatives who fear that
price indexing will bring disaster can point to precedents.

In 1986, the GOP-controlled Senate passed a Reagan-backed
cut in Social Security cost-of-living adjustments that was
rejected by the Democratic House of Representatives. In
Novembers, Republicans lost eight seats and control of the
Senate for the remainder of the Reagan presidency.

Nine years later, a new Republican congressional majority led
then House Speaker Newt Gingrich tried to reform Medicare
and restrain the program's runaway spending. Although the
reform package would have only reduced the rate of increase, it
was widely denounced as an irresponsible benefit cut.
Republicans lost seats in Congress and the episode helped Bill
Clinton revive his flagging political fortunes and easily win a
second term the following year. This is no doubt why Gingrich
himself has urged the GOP not to pursue price indexing.

Economic conservatives face difficult choices in the coming
months. How ambitious a tax reform package can they
realistically craft? A consensus must also be reached on the
following question: Which is more likely to advance, rather than
endanger, Social Security reform -- personal accounts
accompanied with large-scale borrowing, or personal accounts
plus anything that can plausibly be described as benefit cuts?

Now that the era of big government is back, the stakes are high
for both the economic right and the country.

W. James Antle III is an assistant editor of The American
Conservative and a senior editor for Enter Stage Right. The
views expressed above represent his alone.

Enter Stage Right -- http://www.enterstageright.com