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69 IRET Congressional Advisory 1 (1998)

handle is hein.taxfoundation/iretcgadv0066 and id is 1 raw text is: June 5, 1998 No. 69 CUT TAXES, AND DEBT REDUCTION WILL FOLLOW The economic expansion of the last 16 years, interrupted only by the brief and shallow 1990-91 recession, has generated a groundswell of income tax revenues. Combined with restraint, the revenue surge will propel the federal budget into surplus in 1998, according to the Administration, the Congressional Budget Office (CBO), and most private forecasters.' In March, the CBO predicted an $8 billion surplus under current policies in 1998, and surpluses totalling modest spending [T~he governmnent s a lar-ge part of budget surpIluses enhancing fori r-eduction... almost $680 billion through 2008.2 In April, the CBO said the 1998 surplus might be $8 billion to $18 billion;3 in early May, CBO raised its estimate again to a range of $43 billion to $63 billion.4 The Administration had estimated in February that the federal budget would show a $10 billion deficit in 1998, but in May it revised the estimate to a $39 billion surplus.5 Many private forecasters see a 1998 surplus in the $50-$70 billion range.6 These emerging federal budget surpluses (if not forestalled by a recession) could be used to reduce the federal debt, cut taxes, or raise government spending. What mix of options to choose is being debated in Washington. Economic analysis strongly urges that the government should reinvest a large part of the projected budget surpluses in growth-enhancing forms of tax reduction, for three reasons. First, sensible tax relief could increase the rate and duration of the economic expansion, sustaining the good outlook for revenues and the federal budget; without tax relief, the economic expansion will slow.7 Second, appropriate tax reductions and reforms could boost people's incomes by encouraging saving and investment, raising productivity and real wages, and encouraging additional work and employment. Third, tax reductions can achieve this added growth and income more surely than debt reduction, and far more certainly than increased government spending. Unfortunately, there has been little focus on the economic consequences of the choice of options. Instead, politics and cosmetic budget issues seem to be hould reinvest taking the lead. the pr-ojected in growth- One from Column A, one is of tax from column B, lots from column C. Some have suggested that arbitrary portions of the projected surpluses be reserved for debt reduction and tax relief. For example, in 1997, Rep. Mark Neumann (R-WI) introduced legislation that he claimed would direct one-third of the surpluses to tax cuts and two-thirds to debt repayment.8 In fact, all of the supposed debt reduction in the Neumann plan consists of repaying various government trust funds, a technically meaningless gesture unless he intends to increase actual outlays for the trust funds' underlying programs.9 The plan's comments about the Highway Trust Fund and Superfund imply increased spending.1 The pork- laden highway bill that has just passed the Congress shows Congress's eagerness to spend the surpluses. Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic pol icy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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