Rising budget surpluses should be transformed into falling taxes

Schuyler, Michael

Three Reasons for Immediate Action

Both the Congressional Budget Office (CBO) and the Administration's Office of Management and Budget (OMB) foresee huge federal budget surpluses during the next decade under current policies. CBO projects total surpluses of $4.2 trillion over the period 2001-20 10, under its intermediate assumption regarding Washington's adherence to discretionary spending caps, and OMB looks to total surpluses of $3.1 trillion over the same years in its currentservices projection.

These numbers are much larger than those CBO and OMB issued only a few months ago. Compared to last July, CBO has raised its baseline projection for the period 20002009 by $880 billion and OMB has increased its projection by about $170 billion. Even if it makes the pessimistic assumption that the spending caps will fail, CBO now projects a decade-long surplus almost as large as the one it projected six months ago under the optimistic assumption that the caps will hold.

The new figures strengthen the case for using the surpluses to finance deep and powerful tax reforms.

First, it is increasingly clear that the surpluses are real and enormous. They can finance deep tax cuts without the federal budget's going into deficit.

Second, the reason CBO and OMB raised their projections highlights the desirability of pro-growth tax reforms. Economic growth is driving the surpluses, and the surest way for the federal government to facilitate more growth and reduce the odds of an economic downturn is to enact legislation that reduces tax biases against work, saving, and investment.

Third, the reason CBO's upward revision was not higher and OMB's revision, though large, was much smaller than CBO's, reveals an additional reason for reducing taxes: Money left in Washington will largely be spent on an expansion of government; that is already happening. Unless bigger government is judged more desirable than lower taxes, taxes should be cut decisively now.

1) The ederal budget surpluses are real. For years, some people claimed they would favor tax relief if only the federal budget were not in deficit. Then, when.the budget moved into surplus in 1998, some doubters called that a fluke and insisted that surpluses in succeeding years would be too small and uncertain to wan-ant tax relief.

But as government estimators have steadily revised their surplus projections upward, that excuse for denying tax relief has rapidly lost credibility, For instance, in January 1996, CBO's estimators projected a 1999 deficit of $219 billion and they continued to project a 1999 deficit, though smaller with each revision, through their January 1998 estimate.

Similarly, in January 1998, CBO' estimators projected that surpluses would not begin until 20001 and would total less than $400 billion over the period 1999-2006, but in fact Surpluses began in 1998 and, after six upward revisions, CBO's estimators now project a baseline surplus of $2,100 billion over the years 1999-2006.

Although the future is never cast in stone, all evidence points to very large budget surpluses. Unless one adopts the extreme position that advance planning should be completely abandoned and tax and spending commitments never made more than a year in advance, large budget surpluses should be regarded as real and as a credible financing source for tax relief As with other advance planning, plans can be modified, if changed future circumstances warrant.

2) Growth drives the good budget news. The federal budget surplus has increased dramatically over the last several years because the economy has been stronger than CBO and OMB had earlier predicted- A robust economy helps the federal budget on two fronts: It lifts government revenues, in that an expanding economy gives the government more to tax, and it lowers outlays for some government programs, especially means-based ones.

Since last July; chiefly because of its updated growth assumptions, CBO has increased projected revenues by $651 billion for the period 2000- 2009 and reduced projected spending by $355 billion for the same period, a growth-related shift of $1 trillion.

Moreover, the current numbers are probably still too low. Even though real GDP's growth rate has averaged 3.8% over the last 5 years, 3.0% over the last 10 years, 3.0% over the last 20 years, and 3.1% over the last 30 years, CBO projects that it will average just 2.8% over the next decade, and OMB projects only 2.7%. If the economy's future performance is merely average, baseline budget surpluses will be much larger than the already immense ones that CBO and OMB are currently projecting.

The main benefit of growth is not that it fattens the U.S. Treasury but that it improves the well-being of the population. With that in mind, a wise use for the budget surpluses would be to remove tax barriers that now harm the economy.

Tax biases punish people who save and invest and encourage them to consume. High taxes reduce the rewards for work, causing people to work less and in less efficient ways. The projected surpluses are sufficiently large that they could go a long way toward correcting these anti-growth provisions in the tax code.

Part of the surpluses should be used to help finance the transition from the tax-and-transfer Social Security system to private retirement accounts that generate real saving. And part of the surpluses should go toward income tax reform.

Some examples of positive steps to relieve anti-growth income tax biases would be cutting marginal individual and corporate income tax rates, abolishing the capital gains tax and the double-taxation of dividends, and allowing businesses to deduct capital expenditures when the costs are incurred rather than long afterwards (i.e., replacing depreciation allowances with expensing).

The boldest initiative, with the greatest potential to foster growth, would be to replace the current income tax system with a savmg/consumption-neutral tax system based on consumed income.

3) Higher government spending wig consume most of the surplus not returned to taxpayers through tax relief Washington has ahre.dy begun spending projected budget surpluses on increased federal outlays. CBO estimates that spending legislation enacted in 1998 reduced budget surpluses by $48 billion for the period 1999-2008 and that, since last July, additional spending bins reduced budget surpluses by an another $109 billion for the period 20002009. And that may be just the start.

In this year's budget documents, the administration has redefined its budget baseline to quietly shift more than $1 trillion over the next decade from budget surpluses to higher outlays: The administration ignores the caps on discretionary spending that were enacted as part of the Balanced Budget Act of 1997. Many members of Congress also seek to scrap the spending caps.

The message is that if one wants to grow government, keeping the surpluses in Washington is great news, but if one wants economic growth, the surpluses should be converted into deep tax cuts without delay.

ANSWERS

1. Jane Hannan, Democratic U.S. representative from the 36th District from 1992-98, was nominated to run again in her old district against GOP incumbent Steve Kuykendall.

2. Jay Kim, Republican U.S. representative From the 41st District from 1992 until his defeat for renomination in 1998 following his plea-bargain on corruption charges, lost a comeback bid in the neighboring 41st District.

3. House Budget Committee Chairman John Kasich (R.-Ohio), Education and the Workforce Committee Chairman Bill Goodling (R.Pa.), Ways and Means Committee Chairman Bill Archer (R.-Tex.), and Commerce Committee, Chairman Tom Bliley (R.-Va.).

4. Democratic Sen. Estes Kefauver, who held the seat from 1948 until his death in 1963 and sought the Democratic nomination for President in 1952 and '56, and Republican Sen. Howard Baker, who held the seat from 1966 until his retirement in 1984 and who sought the GOP nomination for President in 1980.

5. Republican Sen. Fred Thompson.

Mr Schuyler is Senior Economist with the Institute for Research on the Economics of Taxation and wrote this commmentary for the "IRET Congressional Advisory.'

Copyright Human Events Publishing, Inc. Mar 24, 2000
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