All Commentary
Saturday, April 1, 2000

Cut Taxes, Not the Debt

The Surplus Belongs to the Taxpayers

Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author and editor of several books, including The Politics of Envy.

Last fall’s standoff over the budget between the Republican Congress and Democratic President generated a curious by-product: more money to reduce the national debt. Some analysts want to devote future surpluses to the same purpose, perhaps eventually paying off the entire $5.6 trillion national debt.

Eliminating not only the budget deficit but also the national debt is obviously a worthy goal. Interest payments were the second largest federal expenditure in 1999.

Although low interest rates have been reducing this burden, it will remain above $250 billion annually despite expected surpluses throughout the next decade. We all will be paying the price of Washington’s past profligacy for years to come.

However, it is more important to provide tax relief to Americans who bear this cost. According to the Tax Foundation, the per capita expense of taxes this year is $10,298; the burden is even heavier in high-tax states such as Connecticut, New Jersey, and New York.

This expenditure dwarfs everything else in people’s budgets: shelter ($5,833), health care ($3,829), food ($2,693), transportation ($2,568), recreation ($1,922), and clothing ($1,404). If you separate federal ($7,026) and local ($3,272) levies, taxes still top the list, while taking fourth place as well!

The rise in taxes has been particularly sharp during the Bush-Clinton administrations. Because of these spendthrifts, every American pays an extra $2,000 to accommodate the steadily expanding federal behemoth.

Of course, increasing incomes in a booming economy have helped mask the impact of higher taxes. But that doesn’t make a serious tax cut any less imperative.

Reducing the tax burden would strengthen the economy at a time when some analysts fear an approaching slowdown. With the Federal Reserve hinting at higher interest rates and pessimists predicting the imminent arrival of the stock market bear, let Americans keep more of their incomes. Economists Aldona and Gary Robbins figure that even last year’s modest GOP tax cut proposal would have generated enough new economic activity to cover nearly a third of the lost revenue.

Cutting taxes would also encourage private saving. As the Robbinses observed: “Because the increased federal tax burden (running at 20.8 percent of GDP for the current fiscal year) imposes high marginal rates which discourage saving and investment, the current policy of running surpluses will result in less—not more—U. S. saving.”

The biggest economic bang for the buck would come from reducing capital gains tax rates, liberalizing IRA and pension rules, and adjusting other business levies. However, reducing tax rates on every working person is even more important because it is the right thing to do. People are paying too much for too little. The budget is larded with immoral income transfers, pork, unnecessary programs, special-interest subsidies, and blatant waste. Washington politicians insult people’s intelligence when claiming there’s little or no money to give back.

It is particularly important that any tax cut be across-the-board. Even Republicans often fall prey to demagoguery about not giving tax cuts to “the rich.” Yet the latest analysis of the Tax Foundation shows that the top 5 percent of taxpayers account for over half of income tax revenues, up sharply from a decade ago. The top 1 percent bear one-third of the burden. The top 50 percent pay 96 percent of all income tax revenues.

Denouncing Debt

However, opponents of tax cuts now routinely play the Social Security card. They say we should pay down the national debt to save Social Security. Having spent years advocating a policy of tax, borrow, and spend, they now denounce the debt they did so much to accumulate.

Indeed, the surpluses only invite Congress to increase outlays, which it has been doing. During the budget fight at the end of last year, both major parties tossed money out the Treasury door with wild abandon. The GOP was often worse, determined to prove that it was as “compassionate” as was the President. The Republican Congress wouldn’t even live up to its meaningless promise not to spend the Social Security surplus.

Unfortunately, reports Tom McCluskey, a budget analyst with the National Taxpayers Union Foundation, “Although the new battle cry to ‘Save Social Security first’ has forced many lawmakers to retreat from backing large budget bills, the data show that a sizeable contingent in Congress has continued to advance spending increases.” Although net spending agendas were mercifully down (while the number of spending bills was up) in the 106th Congress, compared to the 105th, legislators were still willing to waste taxpayers’ money on all manner of parochial projects.

McCluskey found that 98 members of the House had net spending agendas that would entirely consume the on-budget surplus; if all the bills were enacted the jump would be $1.4 trillion, nearly doubling the federal budget. Writes McCluskey: “for a sizeable number of Members, belonging to the first Congress since 1970 that inherited a budget surplus has served as a green light to spend the entire windfall on new programs.”

While it is good that legislators now generally eschew huge spending initiatives, their reliance on what McCluskey terms “policy incrementalism” is probably more insidious. It is far easier for politicians to approve a collection of small outlay increases than massive new programs. Indeed, Congress is steadily moving U.S. health care toward President Clinton’s original goal of nationalization through an accumulation of small steps.

The best way to meet the spendthrift temptation is to eliminate the surplus by cutting taxes.

In any case, the debt has nothing to do with Social Security. Because of the demographic tsunami—more elderly, and more of them living longer—by around 2014 the system will be spending more than it takes in.

Cutting the debt won’t change that. Social Security is an unsustainable Ponzi scheme that is breaking down as ever more retirees depend on ever fewer workers.

Of course, lower interest payments would make it easier to shift general revenues to Social Security. But cutting the nonessential programs that dominate the budget would achieve the same end. And those programs should be eliminated in any case.

However, the resulting savings shouldn’t be poured into Social Security’s bottomless pit. By 2070 the annual flood of red ink will be $7 trillion. In fact, between 2010 and 2070 the system is committed to paying out $140 trillion more than it is projected to take in.

Social Security can be “fixed” only by allowing workers to opt out in favor of private investment plans. People would collect better benefits while dropping their claim to a tax-paid retirement.

The federal government expects to collect $22.8 trillion in revenue over the next decade. All this money, and not just the surplus, belongs to the taxpayers, not to the government. Washington should leave it with its rightful owners.

  • Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.