Tax Reduction Is No Place for Creative Bookkeeping

Pssst. There’s a dirty little secret behind the tax cut proposals that the House and Senate will consider this week. They are structured so that their true costs won’t become apparent until after 2002, the target year for balancing the federal budget. Thereafter the Treasury will lose increasing billions of dollars in revenues annually just as the baby boomers begin to reach retirement age, contributing less to government coffers and drawing more in Medicare and other benefits.

Budget experts are warning against Washington’s creative bookkeeping, its “back-loading� of the bulk of the costs of the tax cuts to the years beyond 2002.

The cost to the Treasury in the first five years would be $85 billion, the amount agreed to in last month’s bipartisan budget pact, to be offset by equal spending cuts. Then the costs would soar for measures that include a reduction in the capital gains tax, indexing capital gains for inflation, expanded individual retirement accounts and easing of estate and inheritance taxes. These cuts, benefiting mostly the upper income brackets, are being expanded even as the $500-per-child tax credit is being scaled back at the expense of low-income families.

To keep costs down in the initial five years, the tax changes being trumpeted now would be phased in slowly. For example, the House proposal on capital gains tax cuts also calls for inflation indexing of the gains not to take effect until 2004; then the costs would land heavily.

The IRA proposals on the House side would allow the retirement accounts regardless of income levels; they would collect tax money up front but then allow tax-free interest accrual and no-penalty withdrawals, also back-loading their substantial costs several years down the road.

By using such gimmicks, the House tax proposals limit the cost to the Treasury to $18.4 billion in 1999. But by 2007, the drain would more than double to $41.8 billion, according to congressional figures. Calculations on the Senate version, which initially looks more moderate, are very similar. From 2008 to 2017, the expense of either proposal would skyrocket to between $550 billion and $600 billion for the decade, just as the biggest baby-boomer costs are hitting.

There is no question that there will be federal tax cuts this year, because of the bipartisan budget agreement. And some, like the child credit, are clearly beneficial. But other tax cuts should be scaled back--the first thing to go should be capital gains indexing--and more realistic timetables should be applied.