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Fiscal Cliff Crisis Rooted in Senate Ploy to Pass Bush Tax Cuts

In early 2001, Paul O’Neill, the new Treasury secretary, began work on a plan for radical tax reform. He wanted simpler forms and fewer deductions, which would make it easy for people to prepare their taxes and cost the government less to process them. He presented a five-inch-thick binder of research to a senior White House official.

“Don’t ever let that see the light of day,” O’Neill says he was told. President George W. Bush didn’t want to deliver a tax overhaul. He wanted to deliver the tax cuts he’d promised as a candidate, Bloomberg Businessweek reports in its Aug. 6 issue.

He did, in 2001 and then again in 2003. Yet the kinds of cuts he’d promised -- large ones -- would create unsustainable deficits after 10 years, the Congressional Budget Office projected. So they were designed to expire in a decade, at least on paper.

It was “baloney,” says O’Neill, who publicly supported them at the time. Republicans never intended to let the cuts lapse. “It was put in there so they could make a fiscal claim that it wouldn’t damage us. It had nothing to do with reality.”

It’s now more than 10 years later, and Bush’s tax cuts are still with us -- adding to the debt as predicted. The temporary tax cuts have become a subsidy, and as with all subsidies, to take them away is to create a period of painful readjustment.

Politicians worry about the “fiscal cliff” -- the economic turmoil waiting at year’s end when deep federal spending cuts go into effect and the tax cuts lapse -- as though no one could have seen it coming. There is nothing we know now that we didn’t already know a decade ago.

Watching Forbes

On Dec. 1, 1999, candidate Bush was leading the race for the Republican presidential nomination, looking over his shoulder at Steve Forbes’s promise of a 17 percent flat tax, which was popular with conservatives. At a campaign event in Des Moines, Iowa, Bush vowed that, as president, he would cut taxes for all Americans. According to a widely circulated report prepared by Citizens for Tax Justice at the time, his plan would cost $1.7 trillion over 10 years.

It looked like the money would be there to spend. Fiscal restraint and a strong economy had given Washington something novel to play with: The CBO forecast a federal budget surplus of $5.6 trillion by 2011.

“The people of America have been overcharged, and, on their behalf, I’m here asking for a refund,” Bush told a joint session of Congress after his election. Trent Lott, then-Republican Senate majority leader, had lauded the idea. “It protects the entire Social Security surplus and leaves resources available for other priorities,” Lott said.

Wrong Focus

Those other priorities were more important to voters than lower taxes. In 2001, the Pew Research Center found that 37 percent of Americans preferred to use the surplus to fund Social Security and Medicare, 23 percent for domestic spending, and only 19 percent for a tax cut.

Even after selling the idea as a way to give back part of the surplus, Republicans were concerned that they couldn’t bring on enough Democrats to pass it. So they resorted to reconciliation, the same parliamentary maneuver Democrats would use in 2010 to pass a health-care law.

While that allowed Republicans to get around a threatened filibuster, Senate rules don’t allow bills passed by reconciliation to create deficits more than 10 years in the future. Thus, the 10-year expiration date.

‘A Wink’

“Everyone understood that it was 10 years with a wink,” says Democrat Tom Daschle, then-Senate minority leader.

Bill Hoagland, a Republican who ran the Senate Budget Committee staff, says Republicans assumed they could extend the cuts later. Daschle, who voted against them, remembers it the same way.

“It was a sort of sense that this is a political thing we’ve gotta get behind us,” he says. “Let’s move on, there will be plenty of opportunities to take this more seriously in the future.”

By the next year, things had gotten very serious. The economy was weak and a war was on the way. There were no more surpluses to play with. In 2002, the federal government ran a deficit of $158 billion. The White House began a push for more tax cuts, this time justifying them as a stimulus. Several moderate Republicans warned that further cuts would make the deficits worse.

Yet Hoagland, who then went on to work for new Senate Majority Leader Bill Frist, recalls the administration had begun to rely less on budget projections, which, when rosier, had justified the original tax-cut plan in 2001.

“When your faith is all built on lower taxes,” says Hoagland, “projections don’t matter that much.”

Paper Expirations

The 2003 cuts also came with paper expiration dates of 2004 and 2009. Congress extended them in 2005, a year that tax cuts, along with a slack economy, contributed $416 billion to the deficit. It extended them again in 2007, when the cumulative cuts added an additional $248 billion.

More arrived as a stimulus in 2008, and in the recession that followed the financial crisis Barack Obama and the Democratic Congress added new cuts and agreed to extend the old ones.

Now, more than a decade’s worth of tax cuts are set to come due in about six months, each dreamed up and extended under the fiction that it would be temporary.

In 2011, they helped contribute $1.1 trillion to the debt. In total, since 2001, the CBO calculates that tax cuts have helped add $6.1 trillion to the debt. This is what Washington now calls a crisis: completely predictable arithmetic, compounded over a decade by a consistent refusal to acknowledge reality.

The fiscal cliff has been clearly visible in the distance for years. The reason we’re talking about it now is that, right on schedule, it’s finally become too big to ignore.

To contact the reporter on this story: Brendan Greeley in Washington at bgreeley2@bloomberg.net

To contact the editor responsible for this story: Wes Kosova in Washington at wkosova@bloomberg.net

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