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Tax and Steal

It has happened with the brutal logic of film noir: The protagonist's early mistake puts him in a tight spot. He escapes, but only by plunging into a deeper deception. His escalating series of lies and crimes cut off, one by one, any path to deliverance until, finally, he is caught.

Our story begins in June, when George W. Bush signed his name to a tax cut filled with gimmicks that sneakily disguised its true cost. It was not long, however, before the Bushies realized that they had sucked away so much federal revenue that, in 2002, the government wouldn't be able to fund itself without tapping the Medicare surplus. That would have required Republicans to break their pledge to safeguard the Medicare lockbox--in an election year, no less! So clever minds at the White House came up with a further accounting gimmick: taking $33 billion in corporate tax revenues from 2001 and transferring them to the 2002 budget. That took care of the election-year problem.

But, as in any good noir, the apparent reprieve was only temporary. In late June, with the economy slowing, the projected surplus for 2001 dropped by some $50 billion. Suddenly, the gimmick of shifting money out of 2001, which had seemed a perfect ruse just a few weeks before, became the instrument of a still deeper dilemma. The White House had maneuvered itself into a corner: It was going to have to tap the Medicare surplus. This year.

Before Bush took office, the two parties had reached a rough consensus on debt reduction: The portion of the surplus that derives from general tax revenues could be used for tax cuts or new spending--generally with Republicans preferring the former and Democrats preferring the latter. But the portion that derives from excesses in the Social Security or Medicare hospital trust funds would be placed in a "lockbox," meaning it could only go toward paying off the national debt. Indeed, earlier this year every GOP senator agreed to a resolution stating that "Social Security and Medicare hospital insurance surpluses should be used to reduce the debt held by the public until legislation is enacted that reforms Social Security and Medicare."

Cordoning off the Social Security and Medicare surpluses, while somewhat arbitrary, makes sense. For one thing, the reason the trust funds run surpluses now is to prepare for the deficits they will inevitably run in the future, when the baby-boomers retire. Spending those surpluses on other programs would subvert the whole point. Second, politicians need some artificial device to counteract their natural tendency to shovel out surpluses through vote-buying tax cuts and spending programs. The lockboxes are the best mechanism to force politicians to do the responsible thing and pay down the national debt before the demographic crisis hits.

From the White House's perspective, though, the lockboxes have been a source of near-endless exasperation. This administration, needless to say, values tax cuts above all else, and any money that's locked away for debt reduction is not available for tax cuts. Keeping the government in debt also makes it politically easier to cut spending and privatize social insurance programs. So, even before Bush took office, his economic advisers began looking for ways to justify breaking into the lockboxes. Now, with larceny imminent, the rationalizing has grown urgent.

The man Bush has deputized to explain this state of affairs to the American public is Mitchell G. Daniels, director of the Office of Management and Budget. One of Daniels's favorite techniques is to preface his views on macroeconomic policy by pointing out that he is a country bumpkin. "To me, coming off a turnip truck from the Midwest, the urgent need to enact new spending when the ink is barely dry is curious," he said earlier this year. If you are wondering how a Midwestern yokel managed to become the White House budget director, Daniels pulled off the feat by spending most of his adult life brilliantly imitating a member of the East Coast elite. After obtaining degrees from Princeton and Georgetown Universities, he worked as a Capitol Hill staffer, a White House appointee under Reagan, executive director of the National Republican Senatorial Committee, and president and CEO of the Hudson Institute, a conservative think tank. Then he amassed $30 million as a pharmaceutical executive. Nonetheless, Daniels has not forgotten the simple values of the heartland. "Out here in Indiana," he admonished Sam Donaldson last week, "people are concerned about jobs and income prospects, not bookkeeping entries."

Daniels says we should forget about saving the Medicare surplus--it's one of those "bookkeeping entries" that plainspoken Midwesterners dismiss--in order to help us out of the economic downturn. And, indeed, Keynesian economic theory does suggest that, when the economy slows, the government should put money into the hands of consumers through tax cuts and spending. But Daniels applies this theory only when it suits him: Although the same economic theory argues for spending increases, Daniels wants spending cuts. And Keynesianism recommends only a temporary fiscal stimulus during a recession. Daniels doesn't just want to bust the Medicare lockbox this year. He wants to do so every year. And he has laid the groundwork to do so with a series of clever existential arguments, each more tendentious than the last.

First, Daniels claims that using the Medicare surplus for debt reduction is impossible because the Social Security surplus alone is enough to pay off all the national debt that can possibly be reduced. The White House has been peddling this line since February. It's wrong for a number of technical reasons. It misleadingly plays down the amount of debt that can be redeemed and exaggerates the amount of surplus available--because, instead of using the whole Social Security surplus for debt reduction, the Bushies want to divert several hundred billion for private Social Security accounts. It also ignores the fact that the Social Security and Medicare surpluses could still be saved even if all the redeemable debt was gone: In that happy eventuality, they would simply be invested, just like other government pension funds.

Second, Daniels maintains that "Medicare is not in surplus." This is technically true but intentionally misleading. Medicare is made up of two parts. The part funded by payroll taxes (which pays for hospital insurance) runs a surplus; the part funded by general revenues (which pays for doctor visits) runs a deficit. When politicians refer to the Medicare "surplus" or "trust fund," they always--and necessarily--are talking about the former. For all his efforts, Daniels cannot make it disappear through semantic legerdemain.

In making his case for borrowing from Medicare, Daniels is careful to contrast its status with that of Social Security, whose lockbox he intends, at least for the moment, to leave intact. The Social Security surplus, he told ABC News, "is a true surplus, unlike Medicare." But this is a distinction without a difference: Daniels's arguments subvert the notion of using either surplus for debt reduction. He derides the Medicare and Social Security surpluses as "nothing but a pile of IOUs." Yes, it's true that the trust funds consist of nothing but pieces of paper promising that the government will pay them back. But, as Daniels presumably learned at Princeton, those pieces of paper are also known as Treasury bonds. If they are as worthless as Daniels suggests, the bond market is in for a big surprise.

Indeed, at times Daniels implies that he opposes any reduction in the national debt. "The implication of some sides to this debate is that instead of sharing some of the surplus with the taxpayers at large ... we should have sent it to bondholders instead," he stated last week. "Who are these people, incidentally? It's interesting to me. Thirty-six percent are foreign banks and foreign holders. Of the Americans who hold these funds, these bonds, the famous top one percent [own] forty-three percent."

This argument is so stupefying that even addressing it is intellectually demeaning. Daniels repeatedly characterizes paying down the debt as essentially giving money to bondholders, and other Republicans have started to echo the line. What he neglects to mention is that this is money the government owes them, and until it's paid back, the government--and that means we taxpayers--has to pay interest on it. Paying people back the money you owe them is not some sort of gift. Hopefully, Daniels knows this and is just cynically grasping for an argument, any argument, to justify busting the Medicare lockbox. Or maybe he really did fall off a turnip truck.

Jonathan Chait is a senior editor at The New Republic.