House or Senate shake-up likely to end tax cuts

President Bush’s tax cuts probably will expire in 2010 if Democrats take over the House or Senate, according to top White House economic advisers, who said yesterday that the tax cuts have produced mixed results for the economy.

“This election has consequences” that will reverberate through the economy and shape the debate over federal spending and revenues for years to come, said Rob Portman, director of the Office of Management and Budget.

In an interview with editors and reporters at The Washington Times, Mr. Portman and Council of Economic Advisers Chairman Ed Lazear made a pitch for extending the personal and investment tax cuts, which they believe spurred growth in the economy and stock market.

But they conceded that the tax cuts have not prompted more people to get work and contribute to the economy, while they cut deeply into government revenue and contributed to record budget deficits that have not shown much improvement until recently.

“We do not say the tax cuts pay for themselves,” said Mr. Lazear. “The point is that they created a positive environment for income growth” while helping make the 2001 recession shallower than it otherwise would have been.

The White House expects a dramatic reduction in the deficit for the fiscal year that ended Sept. 30, thanks to a 12 percent surge in revenue that the administration attributed largely to a miniboom in tax collections related to stocks and stock options. A similar but much larger revenue boom in the mid-1990s balanced the budget and created huge government surpluses for the first time.

The stock market has recovered strongly since Congress approved the president’s cuts in taxes on dividends and capital gains, contributing to today’s revenue bounce, Mr. Lazear said. The stock market is not enjoying the hyperbolic growth it experienced in the late 1990s, he said, but its advance to record highs this week was based on healthy growth in corporate profits, and the gains are more likely to stick this time around.

“We’ve had 9 percent growth in the stock market this year. … How fast do you want it to increase?” he said. “To my mind, this is solid growth and we’re happy with it.”

Despite the revenue surge this year, the administration is projecting a precipitous drop in revenue growth to 2.4 percent in fiscal 2007, in large part because of generous cuts in the alternative minimum tax enacted by Congress. Also cutting revenue by $17 billion, they said, is the administration’s decision to eliminate the telephone excise tax that President Theodore Roosevelt enacted to pay for the Spanish-American War, and to refund some of that tax.

Partly as a result of the drop in revenue, the administration expects the budget deficit to rise again in 2007 to $339 billion from $296 billion or less in 2006. As a percentage of economic output, the deficit would rise to 2.4 percent from 2.3 percent, assuming Congress holds a tight line on 2 percent growth in domestic discretionary spending as prescribed by the administration.

Spending on Social Security, Medicare and other entitlements will leap by 9 percent next year, and defense spending increases won’t be far behind, they said. OMB is recommending a 5 percent to 6 percent increase in the Pentagon’s baseline budget, which does not include spending on the war in Iraq.

As in past years, Mr. Portman said the White House will ask Congress to approve tens of billions more in spending on the war after it presents its budget in February. Such supplemental spending requests have been criticized as dishonest budgeting by the Committee for a Responsible Federal Budget and other government watchdog groups.

Mr. Lazear said he sees economic growth bottoming out at around 3 percent this year and next. The economy cannot grow as fast as the 4 percent average growth rates attained in the late 1990s, he said, because growth in the labor force has slowed sharply this decade.

“It’s a function of the aging work force and slower population growth,” he said. Mr. Lazear conceded that the cut in the top tax rate from 38 percent to 33 percent and other Bush tax cuts should have provided an incentive for more people to work, but instead both men and women have been dropping out of the labor force.