NCPA - National Center for Policy Analysis


March 15, 2007

The House Democrats' paygo budget rule, adopted earlier this year, and a new Senate budget resolution, which sets limits under the Senate's existing paygo rule, will require that whenever the House or Senate legislatively expand mandatory spending or reduces taxes, the hit to the budget must be offset by a cut in other mandatory spending or an increase in other taxes, says Stephen J. Entin, president of the Institute for Research on the Economics of Taxation.

There is no logical reason to link taxes and entitlements in the budget (a paygo system), as opposed to, say, taxes and discretionary spending, or discretionary spending and entitlements.  The link is political, says Entin:

  • Paygo was deliberately fashioned in order to make opponents of tax hikes into villains for blocking new entitlements; it also makes it harder to avoid tax hikes and trim government spending.
  • It also lets defenders of discretionary spending off the hook -- since under the House paygo rule, increases in discretionary spending do not need to be offset at all.
  • Paygo is a way of diverting attention from the wisdom taught by Milton Friedman: The true burden of government is what it spends -- not what it takes in taxes.

The paygo rule is a direct threat to the extension of the Bush tax cuts -- or the enactment of any other tax cut in the future, says Entin.  If Congress fails to extend the tax rate caps, investment would take a hit.  The affordable capital stock would shrink; worker productivity, employment and wages would sag; and revenues from corporate profits, dividends, capital gains, payroll taxes and personal income taxes would fall.

Paygo's defenders say deficits reduce investment by cutting national saving and raising interest rates, says Entin.  But the notion that a tax hike on capital will reduce interest rates by raising national saving is nonsense.  In reality, tax increases on saving and investment only reduce private saving and the incentive to invest.

Source: Stephen J. Entin, "The Secret Recipe for High Taxes," Wall Street Journal, March 14, 2007.

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