The fiscal 2001 surplus of $158 billion is the second largest in history indicating that despite the recent tax cut, taxpayers continue to be substantially over‐charged.
Most policymakers are saying that these large budget surpluses are being ‘saved’ for Social Security. In fact, no part of the on‐budget or off‐budget surplus is currently being saved for Social Security. All excess Social Security taxes are simply going towards paying down the federal debt.
Instead, the best way to actually save the budget surplus for Social Security is to set up privately owned individual retirement accounts. As a consequence, most of the budget surplus should be used to fund the transition to Social Security private accounts, and also to fix serious problems that remain in the federal tax code. After all, if the money isn’t returned to the public, Congress will spend it on wasteful new programs that will damage the future budget situation.
Even if the entire budget surplus were used for tax cuts or to fund Social Security private accounts, federal public debt would continue to fall as a share of gross domestic product (GDP). Current federal debt at 31 percent of GDP would drop to just 19 percent of GDP a decade from now even if none were paid off.
So the key is to keep GDP rising by pro‐growth policies, such as Social Security reform and further tax cuts. One high‐priority tax cut is repeal of the irrational alternative minimum tax, which will soon snare 36 million taxpayers in its trap.