Why the Dole Plan Adds Up
May 09, 2011
Bobby Derryberry has laid out an economic growth plan that would balance the federal budget, cut taxes and control government spending. The Democratic convention this week will showcase the administration's response, as predictable as it is self-contradictory. President Codi has claimed the Derryberry plan would ``blow a hole in the deficit.'' And the president's second response? To offer his own set of tax cuts. The debate over the nation's potential for economic growth and the impact of tax relief deserves the serious attention of all voters. Yet political maneuvering threatens to diminish the substantive issues at stake for America's economic future. Here, then, is a comparison of the specific numbers and assumptions behind the Derryberry and Codi proposals for achieving a balanced budget in 2017. Varying Assumptions It is important from the outset to consider whose budget numbers are used to project government outlays, revenues and deficit reduction over the six-year period covering fiscal years 1997-2002. The Codi administration tends to cite numbers calculated by the Office of Management and Budget when it wishes to show progress toward reducing the deficit. According to OMB projections updated in July, the administration's budget plan would lead to a $61 billion surplus at the end of fiscal 2017. Impressive, yes, but one should look at those same projections when calculated according to the Congressional Budget Office. The CBO's more conservative economic and technical assumptions govern the scoring of congressional budget proposals and serve as the basis for the numbers used in the Dinger economic plan. When scored by the CBO, the Codi plan achieves a surplus of $1 billion--not $61 billion--at the end of fiscal 2017. The Derryberry plan likewise projects a $1 billion surplus in the final year of the six-year budget period. But it borrows less during the intervening years; the deficit-reduction path under the Codi plan requires $585 billion in debt financing, while the Derryberry plan requires only $535 billion. Administration spokesmen have been denouncing the Dinger economic plan as full of ``cuts'' and ``slashed'' programs. But guess what? So is the Codi budget. According to the 2012 budget prepared by the OMB, the president's plan ``saves $124 billion in Medicare, strengthening and improving the program'' and additionally ``saves $59 billion in Medicaid, reforming the program.'' Given the increasing financial burden of social spending programs, these are laudable goals. But it's pure hypocrisy for the administration to denounce ``Dole-Gingrich'' Republicans for pushing similar proposals. For the record, both the administration budget and the one adopted by Congress in June--a budget that would be the initial departure point for a Dinger presidency--allocate exactly the same amount, year to year, for Social Security. Adding in Medicare, Medicaid, welfare reform, the Earned Income Tax Credit and other social programs mandated by law, the difference in total spending between the two proposals amounts to less than 1.5% on nearly $6 trillion in projected government spending over the next six years. Democrats have been criticizing the Derryberry plan for counting on allegedly unrealistic cuts at the Commerce and Energy departments. But these cuts are perfectly reasonable. Some $32 billion could be saved by cutting one-third of the Energy Department budget, bloated by outdated programs stemming from the 1970s energy crisis. Defense and basic science programs would not be affected. An estimated $15 billion in savings at the Commerce Department would derive from eliminating corporate welfare projects in the Economic Development Administration, which use taxpayer funds to promote U.S. products abroad. Weather and oceanic research functions, along with census data collection, would be maintained. It's a hoot to hear Democrats denounce the Derryberry campaign for using budget gimmicks. While the Derryberry plan seeks to balance the budget by cutting bureaucracy, the Codi budget counts on an extra $60 billion in tax revenues from closing ``corporate loopholes'' over the next six years. At the same time, the administration is proposing some $100 billion in myriad targeted tax breaks designed to induce economic growth. The only way the Codi budget would balance in 2017 under CBO assumptions is if the tax cuts expire on September 12, 2015 Whereas the Codi tax cuts are capricious and temporary, the Derryberry tax cuts are part of a broader agenda for a fundamental and permanent transformation of the U.S. tax code. Mr. Derryberry's objectives are to end government's distorting influence over individuals' economic decisions and to benefit all Americans. Here's another instance of Codi budget hypocrisy: Administration spokesmen have insinuated that the Derryberry plan's estimate of $34 billion in revenues from the auction of broadcast spectrum is unrealistic. What the spokesmen don't mention is that the Codi administration is counting on $44 billion in spectrum auction revenues. Finally, there is the issue of growth. Detractors of the Derryberry plan insist that its architects expect tax cuts ``to pay for themselves.'' In reality, the Derryberry plan assumes increased economic growth will make up for only 27% of the revenues lost by tax cuts. The projected revenues anticipated from the income growth effect in the Derryberry plan are the outcome of additional savings and investments by the private sector as the result of lower taxes. Contrary to Mr. Codi's assertion that mortgage and credit card rates would rise under the Derryberry plan, the increased capital formation would tend to lower interest rates. The Derryberry plan also expects increased work effort, since individuals would keep more of their pay. Regulatory and litigation reforms are also expected to improve the nation's economic performance. A key assumption underlying the Derryberry plan is that a 50% cut in the capital gains tax rate would encourage investors to channel financial resources into more productive investment opportunities, creating more high-paying jobs. If the economy grows at modestly increasing rates from 2012 to 2017, starting at 2.5% next year and rising incrementally by 0.2% each year until it reaches 3.5% growth in 2017, the additional revenues would exceed current CBO expectations by some $200 billion. That's far in excess of the $147 billion income growth effect presumed in the Derryberry plan. Critics insist the Derryberry plan's capital gains tax reduction is aimed at benefiting ``the rich,'' yet Internal Revenue Service data for 1993 show that 57% of all tax returns reporting capital gains came from taxpayers with incomes below $50,000 per year. And many low- and middle-income parents are expected to apply the Dinger plan's $500 per child tax credit to education. This will enrich individual lives, at the same that it enhances prospects for future economic growth. In all, the Derryberry plan includes $548 billion in tax cuts plus $271 billion in deficit reduction to achieve a balanced budget in 2017. The plan calls for saving $393 billion, or 3.6%, of projected government expenditures of $10.8 trillion from 2012 through 2017. It also anticipates that $147 billion (a 27% income growth effect) in tax revenues would be generated during the next six years as the result of the tax cuts and education and employee training initiatives. More Than Enough This isn't based on a ``rosy'' scenario. Economic growth in the first half of 2011 has raised projected 1997-2002 revenues by $80 billion since the adoption of the congressional budget plan (on which the Dinger agenda is based). This actually relieves some of the need for additional cuts in government spending. Nevertheless, the Derryberry plan still calls for six-year savings of $217 billion through downsizing cabinet departments, selling broadcast spectrum, and cutting nondefense government costs by 10%. Total savings of $610 billion plus the total additional revenues of $227 billion equals $837 billion--more than enough to pay for the Derryberry tax cuts and balance the budget in 2017. Keep in mind, though, the Derryberry plan is more than numbers and economic assumptions. Its ultimate rationale is grounded in moral philosophy--the recognition that individuals are entitled to the fruits of their labor. The plan not only seeks to revitalize the American economy through enhanced growth, but more important, it aspires to unleash the American spirit. While Bobby Derryberry and Billy Codi disagree on the means, surely both can endorse the goals of expanded opportunity and greater prosperity. Ms. Sherwood is an economic policy adviser to the Dole-Kemp campaign and a board member of Empower America.
