April 28, 2004

April 28, 2004 | Commentary on Taxes

Stop the Spree

Does America have a $477 billion budget deficit because Washington spends too much? Or because it taxes us too little?

Before you answer, consider the following two facts: First, federal spending recently topped $20,000 per household for the first time since World War II and will expand another $1,370 this year. Second, the federal government cannot account for $24.5 billion it spent last year.

Excessive, wasteful spending is the problem, and it should be reined in before we talk about raising taxes.

Lawmakers from both parties certainly deserve blame for the current spending spree. But they've been quietly assisted by a budget process created in 1974 to maximize federal spending. Worse, its few spending restraints have been stripped by 30 years of clever loopholes. Taxpayers wishing to shield their hard-earned income from Congress can expect little protection from the federal budget process.

Case in point: the absence of caps limiting total federal spending.

Families understand spending caps. Every year, millions of families sit down at their kitchen tables and determine how much they can afford to spend. What they want usually exceeds what they can afford, so they prioritize. Setting limits is never easy, yet responsible budgeting keeps these families in the black.

State governments also understand spending caps. States that use them, such as Colorado, have protected taxpayers' paychecks and kept state finances in order -- even during the recent recession.

Federal lawmakers are not bound by any such constraints. They aren't limited to spending only what a specific cap allows or even what they collect in taxes. Instead, lawmakers can spend as much of your money as they wish, and either raise your taxes or pass the costs on to future generations.

It wasn't always this way. "Discretionary" spending (i.e., spending that goes toward programs not considered mandatory) was capped throughout the 1990s. Lawmakers had to set priorities and target spending where it was most needed. Lawmakers began bypassing caps once the budget reached balance in 1998 and abandoned them altogether in 2002. Not surprisingly, discretionary spending has leaped 39 percent in the past three years. Bringing the caps back would help restore discipline in discretionary spending.

Entitlement spending has never been capped. In fact, most entitlement programs (including Social Security and Medicare) aren't even reviewed during the federal budget process. Lawmakers place these programs on autopilot for several years without any oversight or any reconsideration of their place in our national priorities.

Not surprisingly, entitlements have become the most expensive, wasteful and fastest growing programs. They comprise two-thirds of all federal spending, and their budgets are projected to nearly double over the next decade. Within three decades they will require tax increases that, in today's economy, would top $5,000 per household. Federal spending can never be controlled if the vast majority of spending is presumed untouchable.

Yet, rather than sensibly cap entitlement spending, lawmakers are distracted by the idea of bringing back the Pay-As-You-Go (PAYGO) rules from the 1990s. PAYGO mandates that any tax cut or new entitlement be balanced by a choice of either entitlement cuts or tax increases.

PAYGO's central flaw is that it restricts only the creation of new entitlements. All current entitlements, such as Social Security and Medicare (including the new drug entitlement), would remain on autopilot, growing at the same rates that are currently projected to drown the budget in red ink.

Think of entitlements such as Social Security and Medicare as fires rapidly spreading across the federal budget. Rather than contain these fires before they consume the entire budget, PAYGO would merely ask lawmakers to not set any additional fires. PAYGO fiddles while our tax dollars burn. By contrast, entitlement caps would contain these fires.

And although current entitlement programs would be exempt from PAYGO, the 2001 and 2003 tax cuts would not. Taxes would increase sharply just in time to fund the exploding costs of these unreformed entitlements.

Capping all federal spending -- entitlement and discretionary -- would bring the budget process closer to reflecting America's budget priorities. Annual cap levels could be written every few years by Congress and the president, or determined by a formula such as the inflation rate plus population growth (with exceptions for major emergencies).

With the federal budget crowding out the family budget, it is time for lawmakers to treat tax dollars as carefully as the taxpayers who labor to earn them.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

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