The Congressional Budget Office's (CBO) mid-July re-estimate of future federal budget projections adds $349 billion of additional surpluses over the next five years to its previous estimate and an additional $932 billion over the next ten years, thereby rendering the recently passed House and Senate budget resolutions obsolete and irrelevant. The CBO now projects the surplus over the next ten years to be $1.6 trillion. The new CBO estimates also reveal that the tax burden on U.S. taxpayers, already the highest in peacetime history as a proportion of gross domestic product (GDP), will rise even higher than expected and remain at these levels through 2002. Never before have both the need and opportunity for tax relief been as compelling as it is today. House Speaker Newt Gingrich has responded to the CBO's news by recommending a $1 trillion tax cut over the next ten years. Meanwhile, House Budget Committee chairman John Kasich has announced that the CBO re-estimates warrant a reconsideration of the budget resolution the House passed in June; he promises to present to the House leadership options that will provide "very, very, very significant tax relief."
It is time for Congress to return to families the excess tax revenue coming to Washington, D.C. When the House and Senate passed their respective initiatives earlier this year, the cumulative surplus for the five-year budget planning period (1999 through 2003) was estimated at $143 billion, and Chairman Kasich proposed to devote the entire amount to tax cuts. But with the Senate agreeing to only a $30 billion, five-year tax cut, and with many Members of the House seeking to add money to the Social Security trust fund or pay down the national debt, the House would approve, by a narrow margin, only a five-year tax cut totaling $101 billion, or $20 billion per year.
With these new projections for the budget surplus, Congress should rethink its position on the budget and recognize that major tax relief is one of the most important benefits it can provide American families and workers. Whatever the reasons that earlier induced Congress to keep the surplus in Washington, they since have been turned on their head by the CBO's re-estimate of future budget projections, which now place the 1999-2003 budget surplus at $520 billion as compared with the March 1998 estimate of $143 billion. Devoting this newly estimated surplus entirely to tax relief would yield an average annual tax cut of $104 billion--enough to give each individual federal income tax payer a tax cut of nearly $1,200 per year. Although such a cut still would be shy of the $140 billion-per-year tax cut needed to get U.S. taxpayers back even to the 1995 tax burden as a share of GDP (18.8 percent) imposed by the last Democrat-led Congress, it nonetheless would mark the first attempt in 17 years to provide serious tax relief to American families.
That some in Congress would prefer to pay down the debt is understandable, considering that the growth of the national debt is a result of 67 years of nearly unrelieved deficit spending (the budget was in surplus in only nine fiscal years in the past seven decades). As a result of this excess spending, the national debt has grown to $5.5 trillion and now represents 66.4 percent of GDP--down somewhat from the past several years but as high as it was in 1955 when World War II debt still loomed large over the country.
Although it is prudent and responsible to pursue such goals as this, doing so at the expense of a historically high tax burden is not. The reason: The cost in terms of the diminution of families' standards of living through higher taxation as well as any adverse effects on economic activity is not likely to be offset by economic benefits from debt repayment.1 Considering the size of the national and global capital markets, recent deficits and debt levels appear not to have had measurable effects on credit markets. Interest rates have dropped consistently and dramatically since the early 1980s despite budget deficits that were at historically high levels during much of that time. Indeed, interest rates during the 1990s have been lower than at any time since the early 1960s, despite the rising credit demands of a robust economy.
Although the goal of debt reduction has a growing following, a much more politically compelling use for the surplus is the huge projected shortfall in Social Security revenues that will occur as a result of longer life spans and the coming retirement of the demographic bulge stemming from high post-World War II birthrates. The shortfall is expected to reach $90 billion by 2015, rise to $500 billion in 2025, and be as much as $1 trillion annually by 2035. President Bill Clinton and many Members of Congress favor devoting any budget surplus--regardless of the tax burden--to the Social Security trust fund. But even the large budget surpluses projected by the CBO would make only a small dent in Social Security's unfunded liability, which amounts to $18 trillion in today's dollars.2 If the surplus is to be devoted to reforming Social Security, the proper approach would be to use it to help finance the transition to a system containing higher-return private accounts.3
Moreover, if the desire for debt reduction and trust fund improvement really were of such compelling concern to Congress as to justify the highest federal tax burden in history, then one also would expect to see significant examples of spending restraint, if not major cutbacks, in marginal federal spending programs. But this is not the case.
Consider, for example, the recently enacted highway bill. Not only did it violate last year's budget agreement, but it did so with a share of the fuel tax revenues (4.3 cents per gallon) that previously had been dedicated to deficit reduction. When that special deficit-reduction tax was scheduled to expire in 1997, Congress could have allowed for tax relief, continued to dedicate it to deficit or debt reduction, or redirected it to Social Security reform. Instead, it went to a budget-busting highway bill that includes more wasteful demonstration projects than ever before. But the highway bill is just one of several instances in which deficit/debt reduction or a Social Security trust fund rescue took a back seat to additional federal spending. Amtrak, urban mass transit (which absorbs 20 percent of federal transport dollars to move less than 4 percent of commuters), the Appalachian Regional Commission, the Corporation for Public Broadcasting, and the Department of Commerce's Advanced Technology Program represent just a few of the hundreds of marginal federal spending programs whose continued funding has been allowed to take precedence over tax relief, deficit/debt reduction, or Social Security reform.
If Congress is serious about reducing the debt or rescuing Social Security, then good policy dictates that redundant spending programs of marginal value be put on the chopping block first--and that the resulting surplus should be in part returned to the taxpayers and in part used to finance Social Security reform. In a recent study, The Heritage Foundation outlines a comprehensive tax package that would return $314 billion in income and death tax reductions to families over the next five years and institute a payroll tax reduction that would begin a major reform strategy to reform Social Security.4 Speaker Gingrich's proposal to use the ten-year, $1.6 trillion surplus projection to provide $1 trillion in tax relief and use the remaining $600 billion for Social Security reform represents an excellent starting point on Capitol Hill. If combined with greater spending restraint, the CBO estimate makes it clear that Congress would have enough financial resources to meet both goals.
-- Ronald D. Utt, Ph.D., is the Grover M. Hermann Fellow in Federal Budgetary Affairs at The Heritage Foundation.