Democratic senators want the Senate Budget Committee to delay approval of a fiscal year 2004 budget until President Bush gives cost estimates for the impending Iraq war. By coincidence the Congressional Budget Office has just published its biannual menu of possible tax increases and spending cuts. The CBO study offers many ways to raise the $100 billion that some economists estimate a war would cost.
The CBO’S estimate, released last week, is that prosecuting a war against Saddam Hussein’s regime would cost $10 billion in the first month and then $8 billion a month thereafter.
The CBO analysts did not address the cost of rebuilding the infrastructure of Iraq.
The CBO analysis also did not try to assess the economic imponderables of a war, such as whether a resolution of the Iraq crisis would generate faster growth in the United States or whether a prolonged war would tilt the economy into recession.
Even granted the uncertainties, if one uses $100 billion as a starting point, then the CBO’s budget options menu provides the following 10 steps — all easily understood by members of Congress — that could raise such a sum.
These options, each calculated for one year, are just some of the many possible ways to reach that $100 billion total:
SUBJECT ALL EARNED INCOME TO THE SOCIAL SECURITY TAX: $66 billion.
Under current law, only earnings up to a specified maximum are subject to the Social Security tax.
The maximum, which is $87,000 for 2003, automatically increases each year.
Making all earned income subject to the Social Security tax would increase the burden on higher-income people, but, under the tax law enacted in 2001, they are benefiting from a cut in income tax rates. That income tax cut would offset part of any Social Security tax increase.
But, one might ask, won’t the revenue from a Social Security tax increase go into a “trust fund” and be walled off from use for paying for a war?
No, contrary to popular belief, the revenue raised by the Social Security tax is not put into a trust fund. Instead it becomes part of the government’s operating cash pool, just as income tax revenues do.
The Social Security system is credited with IOUs, federal securities that are essentially a promise that future benefits will paid. Currently Social Security takes in about $150 billion more in revenue than it needs to pay benefits, but by 2041 it will face a shortfall.
INCREASE TAXES ON MOTOR FUEL BY 12 CENTS PER GALLON: $15.3 billion.
The current federal tax on gasoline is 18.4 cents per gallon, while the tax on diesel is 24.4 cents per gallon.
The CBO says that increasing the tax by 12 cents per gallon would impose a disproportionate hardship on rural households and, given that gasoline prices at the pump are now more than $2 a gallon in some places, it would be a tough sell to members of Congress.
But some members have called on President Bush to ask Americans to make sacrifices for the war effort, and a higher gas tax is one sacrifice that all drivers can understand.
RAISE THE TAX ON CIGARETTES BY 50 CENTS PER PACK: $6.6 billion.
The federal cigarette excise tax is now 39 cents per pack; most states also impose their own excise taxes on cigarettes.
Unlike the Social Security tax increase, this option would increase the burden disproportionately on low-income Americans. The CBO says, “Lower-income people are more likely than other income groups to smoke, and ... expenditures on cigarettes by people who smoke do not rise appreciably with income.”
INCREASE ALCOHOLIC BEVERAGE TAXES: $4 billion.
Under current law, beer, wine and hard liquor are each taxed in different ways by the federal government. The CBO says a uniform method of taxation, combined with an increase in the tax per unit of alcohol, would raise the tax on a six-pack of beer from about 33 cents to 81 cents, and the tax on a bottle of table wine from about 21 cents to 70 cents.
REPEAL TAX BREAKS AND SUBSIDIES FOR FOSSIL FUEL INDUSTRIES: $3 billion.
The tax code gives preferential treatment to producers of oil, gas and coal. For example, it allows fossil fuel firms to deduct exploration and development costs from their taxable income as soon as they are incurred rather than deduct them over time as income is generated.
Ending the preferential tax treatment as well as scrapping fossil fuel research subsidy programs run by the Department of Energy would raise energy prices, which would encourage conservation.
INCREASE FEES FOR TRANSPORTATION SECURITY: $2.6 billion
According to CBO analysts, it will cost the federal government an additional $4.7 billion to provide tighter security at the nation’s airports this year. But the fees imposed on airlines and on air travelers — $2.50 each time you board a plane — do not recover that full cost.
Increasing the security fees would make air travel more expensive — but those who most directly benefit from tighter security are the same travelers who’ll be paying the higher fees.
END THE TAX BREAK FOR ALCOHOL FUELS AND LIMIT FARM SUBSIDIES: $950 million
Critics of the ethanol industry have long complained that such firms as Archer Daniels Midland reap an unwarranted benefit from the tax break that partially exempts ethanol-blended fuels from the federal fuels tax.
In addition, the taxpayer provides subsidies to farmers who grow wheat, feed grains, cotton and rice. The CBO suggests that such payments could be limited to $75,000 per person instead of the current limit of $210,000 per person.
ABOLISH THE TAX BREAK FOR AMERICANS LIVING ABROAD: $700 million.
U.S. citizens who live abroad can exclude from U.S. taxation some of the income they earn overseas. The CBO says that in 2002, the tax break was as much as $160,000 for qualifying married couples.
While Americans living abroad don’t get the same U.S. government services that Americans living at home do, their citizenship is worth something. A wartime tax increase would be one way to remind them of the value of that U.S. citizenship.
GET RID OF THE GRADUATE STUDENT LOAN SUBSIDY: $625 million
Getting a Ph.D. for your study of Elizabethan love poems or relativistic quantum field theory?
If so, you are probably eligible for a taxpayer-subsidized federal loan and for loan forgiveness for six years after you leave the university.
Restricting federally subsidized loans to undergraduates would impose a hardship on graduate students, but unsubsidized bank loans would still be available to them.
ELIMINATE EXPORT PROMOTION AGENCIES AND PROGRAMS: $263 million.
An array of federal agencies — the Export-Import Bank, the Overseas Private Investment Corp., various parts of the Commerce and Agriculture departments — help U.S. firms and farmers sell their products overseas.
If these export promotion programs were ended, U.S. firms and farmers would still be able to sell their products abroad but would have to pay more of the promotional cost themselves.