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79 IRET Policy Bulletin 1 (1999)

handle is hein.taxfoundation/iretpbul0038 and id is 1 raw text is: November 19, 1999 _No. 79 FUNDING A TAX CUT WITH THE FEDERAL SURPLUS: WHAT ARE THE ISSUES?* Recent strength in the economy and income tax revenues have led to projections of large federal budget surpluses, totalling nearly $3 trillion over ten years. There are a limited number of options for using the projected budget surpluses. They could be spent on government consumption or additional transfer payments and entitlements. They could be used for government investment in infrastructure or R&D. They could be allowed to draw down the national debt. They could be used to reduce taxes in a variety of ways, some of which would improve the functioning of the economy, some of which would not. The best use of a large portion of the surplus would be to reduce taxes in a manner th0at wouli ovethefunctioniig oftheeconomy. Thetaxcutsshould be part of a transition from (1) the current income tax to a saving-deferred consumed-income-based tax system and (2) from the pay-as-you-go Social Security System tofundedprivate retirement saving accounts. Additional government consumption and transfer payments (such as a new prescription drug benefit for Medicare) do not improve the economy, and should not be allowed to absorb any significant portion of the surplus. Government investment, while better for the economy than government consumption, is limited in scope. That limited scope is good, because government investment is not often based on a careful calculation of the rate of return, and is often less productive than private uses of income. That leaves us with two main options for using the surplus to improve the economy: debt reduction and tax reduction. * This paper is based on remarks originally presented before the National Tax Association Annual Meeting in Atlanta, Georgia on September 27, 1999. Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 * Washington, D.C. 20006 Taxation (202) 463-1400. Fax (202) 463-6199. Internet www.iret.org

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