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171 IRET Congressional Advisory 1 (2004)

handle is hein.taxfoundation/iretcgadv0168 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. April 1, 2004 Advisory No. 171 PAYGO DISPUTE SEPARATES HOUSE AND SENATE BUDGET RESOLUTIONS The House and the Senate Budget Resolutions would renew, in two different ways, an expired pay- as-you-go (PAYGO) provision aimed at reducing the federal budget deficit. Conference awaits. The expired provision provided that any legislated expansion of entitlement spending or any tax reduction be matched by offsetting changes in those same two areas. That is, an expansion of entitlement spending would require either a matching cut in other entitlements or a tax increase; a reduction in taxes would require either a matching tax increase or a cut in entitlements. In renewing the provision, the Senate keeps the same general form; either a tax cut or an increase in entitlement spending would have to be offset one way or another. The House version would require an offset to an entitlement increase, but would allow a reduction in taxes without an offset. The House version is aimed at accommodating the Administration proposal to make permanent the 2001 and 2003 tax reductions for individuals that are due to expire over the next few years. The obvious political differences aside, a sensible question to ask is, Does one or the other plan to extend PAYGO make more technical economic sense? The answer is a qualified Yes, the House version, but only if it is applied with care. If one were to approach the issue verbally, like a lawyer, accountant, or abstract philosopher, one might argue that a) the object is to keep the deficit from rising (because everyone says that is the objective), and b) the deficit is outlay less revenue, and both outlay and revenue are equally valid concepts and both can be expressed in dollars, so c) it makes no difference whether both are unchanged, or outlays and revenues rise together, or outlays and revenues fall together. In all cases, the deficit would remain the same. That analysis might get a passing grade if you are in a semantics course or arguing in moot court, but go to the rear of the class if the subject is economics. Outlays and taxes affect the economy in different ways, and not chiefly by altering the budget deficit. Tax and spending changes affect the economy by altering incentives to work, save or invest, or by raising or lowering the cost of goods and services needed by the private sector, not by giving people money to spend or by pumping up demand. Any non-trivial demand effects of a tax cut or spending hike not financed by money creation are offset by equal and opposite increases in federal borrowing. The outlays that have the most economic impact are not even covered by the PAYGO provision. Increased government spending on goods and services is likely to have a negative impact on economic activity, whether it is paid for by taxing or by borrowing. Chiefly in the category of discretionary spending, these outlays take real resources such as manpower, material, land, and energy away from the private sector, raising its costs and making that sector shrink. It has been decades since sensible economists regarded government spending as expanding, rather than reshuffling, GDP (except in those rare cases where some infrastructure actually passes a cost- benefit test, i.e., has a higher return than other uses of the money, which most pork barrel outlays, including many highway projects, do not). Controlling the Congress's inherent tendency to overspend in this category requires a discretionary spending cap. PAYGO doesn't apply. e~em kfl A * gg~ 8 ~eg

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