NCPA - National Center for Policy Analysis


January 5, 2007

The new Democratic version of a pay-as-you go (paygo) budget rules for Congress are supposed to look like prudent budgeting practice.  But in reality, it is a budget trapdoor, designed not to control expenditures but to make it easier to raise taxes while blocking future tax cuts, says the Wall Street Journal.

Paygo enthusiasts claim that when these rules were in effect in the 1990s the budget deficit disappeared by 2001.  But budget improvements in the late 1990s were the result of events completely unrelated to paygo, says the Journal, including:

  • The initial spending restraint under the Republican Congress in 1995 and 1996 as part of their pledge to balance the budget.
  • A huge reduction in military spending, totaling nearly 2 percent of gross domestic product (GDP), over the decade.
  • Rapid economic growth, which always causes a bounce in revenues.

What's more, this version of paygo applies only to new entitlements or changes in laws that expand current programs.  And on present trajectory, Medicare, Medicaid, Social Security, food stamps and the like are scheduled to increase federal spending to almost 38 percent of GDP by 2050, up from 21 percent today.  Paygo won't stop a dime of that increase.

What paygo does restrain, however, are tax cuts, says the Journal.  By requiring that any tax cut be offset dollar-for-dollar with some entitlement reduction, paygo will only hurt the revenue windfall enjoyed by the government:

  • In the wake of capital gains and dividend tax-rate cuts, federal revenues climbed by a record $550 billion over the past two fiscal years.
  • Incidentally, thanks to the current economic expansion and the surge in tax revenues, the budget deficit has fallen by $165 billion in just two years -- without paygo.

Source: Editorial, "Tax As You Go," Wall Street Journal, January 5, 2007.

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