President Bush made clear yesterday his opposition to raising payroll taxes in order to fund potential changes to social security. A payroll tax is a percentage of an individual's salary that goes into social security and medicare funds. The percentage paid into those funds is matched by employers, in order to raise adequate revenue for these entitlement programs.

While this administration is seriously looking into reforming social security -- an anti-poverty program which was implemented during the New Deal -- they have yet to explain how they will pay for this overhaul, which could cost anywhere from $1 - $2 trillion in transfer costs alone. On top of this, the administration has pledged to cut the deficit in half by 2009, and keep the first term tax cuts in place. Raising payroll taxes could help pay for social security overhaul, and even though the policy appears to have bipartisan support in Congress, the President has ruled it out as an option.

The fact that this administration is unwilling to look into raising payroll taxes means that they are more likely to look into increased borrowing or non-defense discretionary budget cuts to help stabilize the economy. In an article in today's Washington Post, Congressman Robert Matsui (D-CA) is quoted as saying, "I fear this means the administration will employ sham accounting gimmicks in an attempt to hide the true costs of their privatization schemes. Ultimately, hiding the truth about benefit cuts or fleecing the public on massive borrowing would have a disastrous effect on the economy, not to mention betray the trust of the American people."

Over the weekend Congress passed a $388 billion spending bill that included funding for the nine appropriations bills that remained unfinished when the fiscal year ended on September 30th. The massive omnibus bill was scheduled to go to the White House to be signed by the President early this week, however it was held up on Capitol Hill as lawmakers rushed to remove a provision from the bill that wasn't supposed to be there.

The provision, buried on page 1,162 of a 3,600 page document, would have given House and Senate Appropriations Committee staffers the power to enter IRS facilities and examine American's tax returns. This right is only currently available to the tax-writing committees of the two chambers. Embarrassed Republican lawmakers expressed surprise that this provision was included in the omnibus and blamed both the IRS and congressional staffers for incorporating it into the bill. Once it is removed, it will be sent to the White House.

The process of passing all unfinished spending bills in a massive omnibus is detrimental because it is more secretive and rushed than it would be if the spending bills were each passed separately, and on time. According to this informative Washington Post article, "When the measure was rushed to the floors of the two chambers on Saturday, few members had read it." Professor of Public Policy Allen Schick noted that the inclusion of this provision shows "how easy it is to put something in [an omnibus bill] without anybody else knowing about it."

Fortuntely this provision was caught before the bill was signed by the President. It does demonstrate, however, the problems of a process that allows this to take place. As Representative Ernest J. Istook (R-OK) stated, "We have a problem with how bills like this are put together." Senator Kent Conrad (D-ND), who serves as the ranking Democratic Member of the Senate Budget Committee, also comments on this issue in his floor statement on the subject, which you can read here.

For additional information, see this Washington Post article.

As President Bush faces a second term, one of his first actions will be to define his goals and lay out agenda for the next four years. As Bush outlined on November 3rd, two of his most ambitious plans include both reforming the federal tax code and making changes to social security, all while continuing to fight a war against terrorism.

While this ambitious agenda is perhaps helped by the fact that the President has majority support in both Houses of Congress, it is hampered by some of the policy changes he forced through during his first term. Bush begins his second term with the economy in somewhat of a different state than he faced when first taking office. While in 2000 the nation enjoyed a healthy budget surplus, this year has the nation facing a large deficit as well as growing homeland security and defense needs. Federal tax revenue was $100 billion lower this year than it was when Bush first took office. On top of this, spending was $400 billion higher. This large discrepancy between revenue and spending has helped to create the largest budget deficit in our history. And, in response to four years of rising budget deficits, the Treasury announced on Wednesday that the government will borrow $147 billion in the first three months of 2005, to help fund its programs and policies. This level of borrowing, when it occurs, will be a new quarterly record.

Thomas Mann of the Brookings Institution recently said, "On the domestic side, huge budget and current account deficits, historically low federal revenues as a share of GDP, the approaching retirement of the baby-boom generation, health care cost inflation, and escalating spending pressure for homeland security and defense will handcuff a president hoping to pursue new policy initiatives.

This administration will seriously be looking into trying to make permanent some of the tax cuts they passed over the last four years, and Bush has already laid some of the groundwork for this. Permanent tax cuts would greatly impact the amount of federal revenue collected by the government, and would cause even greater financial strain for agencies and institutions that rely on the government for funding. It is estimated that permanent tax cuts could cost the government $1 trillion dollars in revenue between 2005 and 2014.

When Bush sends his version of the budget to Capitol Hill early next February, it will clearly demonstrate how far this administration is willing to go to push the policies they outlined at both the Republican National Convention and on the campaign trail. For more information on second-term tax and budget issues, click here and here.