Opinion Editorial | |
| Wednesday, February 18, 1998 | |
Paying Down Debt May Be Only Option |
The prospect of federal budget surpluses, rather than deficits, has fundamentally
changed the debate over economic policy in Washington. The deficit created
a straightjacket that constrained all efforts to significantly alter the
direction of economic policy. Those wishing to expand government's role
by offering new programs were prevented from doing so, while those wishing
to scale back government's role by cutting taxes were equally blocked. Thus the prospect of surpluses has created new opportunities for both
those wishing to expand government and those wishing to curtail it.
Thus far, House Speaker Newt Gingrich has attempted to avoid conflict
by promising a third of the surplus to each Republican group. Only in recent days, however, has it begun to dawn on the Republicans
that they really have only one option for using the surplus and that is
to pay down debt. The reason is because the law is indifferent to whether
the budget is in surplus or deficit; the same rules that applied when the
budget was in deficit apply equally when there is a surplus. The most important
of these rules is called the PAYGO rule, which requires that any new programs
or tax cuts be "paid" for with higher taxes or cuts in entitlement
programs, such as Medicare. It is not possible to "pay" for a
tax cut or new programs by cutting non-entitlement spending, such as defense.
And non-entitlement spending is subject to tight spending caps that are
also written into law. While in principle, the PAYGO rule constrains tax cuts and new spending
equally, Mr. Clinton has been much more creative about getting around the
problem. He has cleverly designed his new spending initiatives as tax provisions
and paid for them with higher tobacco taxes. Thus, he has adhered to the
letter of the law, if not its spirit. Economists have long known that tax provisions can often be designed
to be equivalent to spending. The best example is the Earned Income Tax
Credit, which subsidizes workers with low incomes. Because the credit is
refundable -- meaning that those who qualify get the credit even if they
have no income tax liability against which to apply it -- some three-quarters
of the EITC consists of checks sent from the Treasury. Thus the EITC really
is a welfare program disguised as a tax provision. Tax provisions such
as this are often referred to as tax expenditures for this reason. Thus Mr. Clinton proposes expanding the child and dependent care tax
credit and instituting a new tax credit for private employers to establish
day care facilities as key elements of his agenda. Because these technically
are tax provisions, even though they are in effect spending programs, they
can legitimately be enacted if offset by higher cigarette taxes. Republicans seem to have only lately realized how confining the budget
rules are in terms of their ability to offer another tax cut this year.
They may try to target any new revenue from tobacco taxes to broad-based
tax relief, but that will still leave the overall level of taxation unchanged.
Thus, by default, it may be that the only thing they can do with the surplus
is retire some of the government's debt. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
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