Democratic presidential candidate John
Kerry recently pledged that, if elected, he would cut the budget
deficit in half by 2008. Given the projected $422 billion budget
deficit in 2004, his pledge translates into a $211 billion budget
deficit in the next four years.1
Realistically, Senator Kerry's current tax
and spending proposals would actually increase the budget deficit.
Third-party estimates project that Senator Kerry's proposals would
raise the 2008 budget deficit to $525 billion. Even a rosy
projection that, whenever possible, relies on the Kerry campaign's
own numbers reveals a 2008 budget deficit of $443 billion.
This
budget deficit is merely a symptom of the runaway spending disease.
By focusing on reducing the short-term budget deficit, Senator
Kerry ignores the mountain of impending Social Security and
Medicare debt that, if left unreformed, will dwarf any temporary
savings that could be achieved.
When
former President Bill Clinton's campaign promises proved
incompatible with his deficit reduction pledge, he used tax
increases to bridge the gap. Should Senator Kerry choose the same
route, he would have to raise taxes by $2,090 to $2,829 per
household (depending on which budget estimates are used) in
addition to his current proposed tax increases.
Senator Kerry's Proposals
A
closer look at Senator Kerry's proposed budget reduction strategy
reveals the following:
Taxes.
Senator Kerry has proposed repealing the Bush tax cuts for
households earning over $200,000 annually while making permanent
the recent middle-class tax cuts. In addition, Senator Kerry has
called for new tax credits for health insurance and higher
education, a series of business tax changes, and a fix to prevent
the alternative minimum tax (AMT) from steeply raising taxes for
millions of middle-class families.2
Spending. Senator Kerry has proposed a
new comprehensive health care plan that aims for 95 percent overall
health coverage and 100 percent coverage for children. He has also
called for sharp spending increases in areas such as education, aid
to states, homeland security, defense, Head Start, veterans'
benefits and health care, and combating global AIDS.
Budget
Deficit. Senator Kerry recently pledged to halve the
budget deficit by 2008. Given the current Congressional Budget
Office (CBO) estimate of a 2004 budget deficit of $422 billion, his
pledge translates into a $211 billion budget deficit in 2008.3
Calculation 1: A Rosy Estimate
Whenever possible, this budget estimate
relies on either the Kerry campaign's own estimates or the rosiest
estimates widely available. Beginning with the CBO's 10-year budget
deficit baseline,4
Senator Kerry's tax proposals are incorporated using estimates from
the Tax Policy Center, a joint venture of the Urban Institute and
the Brookings Institution.5 They project that the proposed income
and estate tax changes (excluding targeted tax proposals, such as
health care and education, which are counted on the spending side)
would increase the budget deficit by $364 billion over 10 years.6
This
estimate excludes Senator Kerry's pledge to fix the AMT; therefore,
the CBO estimate of $340 billion over 10 years must be added as
well.7 This estimate
also accepts Senator Kerry's controversial contention that his
business tax proposals would be revenue neutral.
Regarding spending, American Enterprise
Institute (AEI) analysts summed up all of Senator Kerry's spending
proposals (as well as his targeted tax proposals) using the Kerry
campaign's own cost estimates whenever possible.8 This estimate totals $1.116 trillion
over the next decade.
Table 1 shows that even these lower-end
projections reveal a 2008 budget deficit of $443 billion--which is
$232 billion higher than the Kerry campaign's $211 billion target.
Far from being a deficit reduction plan, Kerry's plan actually
increases the 2008 budget deficit above the CBO baseline. Unless he
scales back his ambitious spending plans, Senator Kerry would need
to raise taxes by an additional $232 billion--or $2,090 per
household--on top of his current proposed tax increases in order to
fulfill his deficit reduction pledge.
Calculation 2: A Skeptical Estimate
Campaigns typically understate the cost of
their spending proposals. In addition, tax rate increases, such as
those proposed by Senator Kerry, reduce incentives to work, save,
and invest, thereby reducing economic growth and leaving less
income to tax. Consequently, it is likely that Senator Kerry's
spending proposals will cost more than advertised and that his
proposed tax increases will produce less revenue than
projected.
A
skeptical estimate adjusts for these factors. On the tax side, The
Heritage Foundation's tax model estimates that Senator Kerry's
income, estate, and business tax proposals would increase the
budget deficit by $438 billion over the next decade (excluding his
targeted tax proposals, which are counted on the spending side in
this analysis).9
Senator Kerry's business tax provisions account for most of the
difference between the Heritage Foundation and Tax Policy Center
estimates. The Tax Policy Center analysis excluded this policy
(which the Kerry campaign claimed would be deficit neutral), yet
the Heritage Foundation calculated a $38 billion revenue loss over
the decade.
In
addition to its earlier calculation, AEI also added up the Kerry
spending (and targeted tax) proposals by relying primarily on
third-party sources. This method calculated $1.734 trillion in new
spending over the decade, which is significantly higher than the
earlier $1.117 trillion estimate that relied heavily on the Kerry
campaign's estimates.10 Most of the $617 billion difference
between the two estimates can be found in Senator Kerry's proposals
to provide mandatory funding for veterans' health care (estimates
range between $26 billion and $300 billion over 10 years);
near-universal health care ($653 billion to $850 billion); and
education ($403 billion to $492 billion).11
Overall, this skeptical estimate of
Senator Kerry's proposals projects a 2008 budget deficit of $525
billion, which is $314 billion above Kerry's $211 billion deficit
target. (See Table 2 and Chart 1.) Unless he cuts spending, closing
that gap would require a tax increase of $2,829 per household in
addition to Senator Kerry's current tax increase proposals.
Conclusion
Senator Kerry has promised to halve the
budget deficit to $211 billion by 2008. However, by any reasonable
calculation, his budget proposals would increase the budget deficit
well above the current CBO baseline. A rosy calculation reveals a
2008 budget deficit of $443 billion, while a more skeptical
calculation shows a $525 budget deficit. The deficit, however, is
merely a symptom of the budget problem of runaway federal spending,
which cannot be solved without addressing runaway entitlements.
If
elected, Senator Kerry might be tempted to follow former President
Clinton's lead by choosing steep tax increases to fulfill his
deficit reduction pledge. Depending on which budget estimates are
used, that approach would require additional tax increases of
between $2,090 and $2,829 per household. Given that federal
spending already tops $21,000 per household, those tax increases
would be a painful price for taxpayers to pay.
Brian M.
Riedl is Grover M. Hermann Fellow in Federal Budgetary
Affairs in the Thomas A. Roe Institute for Economic Policy Studies
at The Heritage Foundation.