NCPA - National Center for Policy Analysis

Tax Cuts The Budget Surplus Could Fund

April 23, 1999

The Congressional Budget Office (CBO) recently projected that the next 10 federal fiscal years could produce as much as $2.6 trillion in cumulative budget surpluses. While most of this surplus is from excess Social Security payroll taxes, the CBO forecasts $824 billion in non-Social Security surpluses over 10 years.

Thus Congress could both cut taxes and reform Social Security, says William W. Beach of the Heritage Foundation. Congress could preserve 68 percent of the overall budget surplus, including all of the $1.78 trillion in Social Security surpluses, for reforming the system. The remaining $874 billion -- ignoring the dynamic effects of tax cuts on economic and revenue growth -- could, over the 10 year period, be used to:

  • Provide "marriage penalty" relief of $194.1 billion;
  • Reduce the tax rates on long-term capital gains by 50 percent, at a cost of $47.8 billion;
  • Phase out federal death taxes ($143.8 billion);
  • And cut individual marginal income tax rates by 10 percent ($315 billion).

Additional tax cuts could expand eligibility for educational savings accounts ($4.4 billion); allow workers to roll-over to future years their deposits to "cafeteria plans" ($5.9 billion); and provide taxpayers who pay for their own health care a 30 percent credit against federal income and payroll taxes ($33.5 billion). Another tax cut, expanding eligibility for Roth IRAs, would actually generate $3.6 billion more in revenue. And repealing the surtax on federal unemployment taxes ($14.4 billion) would lower payroll taxes.

If these tax reductions were enacted, says Beach, there would still be $68.7 billion in non-Social Security surplus funds that could be used for additional defense spending.

Source: William W. Beach, "How Congress Can Use The Surplus To Cut Taxes And Begin Fundamental Tax Reform," Backgrounder No. 1270, April 13, 1999, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington D.C. 20002, (202) 546-4400.


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