Commentary

Plenty of Budget Room

This article originally appeared in USA Today on August 7, 2001.
This year’s $1.35 trillion tax cut was a good first step toward fixing the federal tax system. The cut lowers income tax rates and excessively high tax levels. Individual income taxes peaked at 10.4 percent of gross domestic product in 2001, up from 7.7 percent in 1992. This ratio will fall to 9.4 percent when the tax cut is fully phased-in, which is an improvement, but still higher than historical norms.

Serious problems with the tax code remain. The new law only took baby steps in fixing the marriage penalty, the tax code bias against savings, and the alternative minimum tax (AMT). The complex AMT, which was originally aimed at the rich, will hit 36 million families by 2010 if not reformed. Many prestigious groups, such as the American Bar Association, have called for AMT repeal. With three-quarters of the 10-year, $5.6 trillion budget surplus remaining, there is plenty of room for these and other reforms.

It is true that new figures will show lower surplus estimates because of the slowing economy. But who’s to say we won’t be surprised a year from now with faster than expected growth and rising surpluses? After all, the official projection for the 2001 surplus jumped from $177 billion in January 2000 to $281 billion in January 2001.

Also note that government estimates don’t account for the positive feedback of pro-growth tax cuts. With lower tax rates, taxpayers increase earnings, undertake more entrepreneurship, and evade taxes less. As a result, the government only loses about 75 cents for every $1 of official cuts. The $1.35 trillion cut will actually cost the government just $1 trillion.

Besides, putting needed tax reforms on hold because the economy is slowing places the cart before the horse. A simpler and more efficient tax system will create economic gains for years to come. These gains will ensure continued budget surpluses as long as Congress keeps a lid on spending. So let’s not put an artificial straightjacket on further tax cuts, as there is plenty of budget room and much to be done.

Chris Edwards, a former senior economist with the Joint Economic Committee of Congress, is director of fiscal policy studies at the Cato Institute.