NCPA - National Center for Policy Analysis


February 25, 2008

Pay-go, short for "pay-as-you-go," made a name for itself in last year's fight to forestall the alternative minimum tax's (AMT) full impact.  The attempt to stop a tax hike with an offsetting tax hike underscored the procedure's dubious nature when applied to tax cuts, says J.T. Young, a former Treasury Department and Office of Management and Budget official.

By applying the pay-go principle to tax cuts, Washington is effectively chasing its fiscal tail:

  • Because Washington will not cut spending, taxes will never go down, only up.
  • Using it for short-term tax cut extensions, like the one year AMT patch, is the budget equivalent to renting tax policy.
  • At the end of the extension, the lease on the patch ends, but the offset is gone.
  • Continually repeating the process consumes the relatively easy offsets, and ever more tax increases -- and worse tax policy -- are needed.

Most importantly, pay-go's application to tax cuts dismisses the revenue increases inherent in the U.S. tax system, says Young.  Under a progressive tax code such as ours, revenues increase -- even without legislated increases -- when the economy grows. This has been happening over the past few years.

Unbiased observation shows that pay-go applied to tax cuts is not a viable long-term strategy.  Over time it increases the tax base, turbocharging the tax system's inherent revenue increasing capability, says Young.  Last year's AMT fight shows pay-go's application to tax cuts is not a short-term strategy either.  Ostensibly created to solve a fiscal problem, pay-go became a political one. Fortunately in the process Congress did come to the right conclusion.  Now that solution just needs be applied to all pre-existing tax cuts and the fiscal fulminations redirected to spending where they belong.

Source: J.T. Young, "How 'Pay-Go' Turbocharges The Tax Code," Investor's Business Daily, February 21, 2008.


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