Originally published in The Boston Globe
Tuesday, October 10, 2000

A clear choice on tax policy
By Martin and Kathleen Feldstein

"Bush plan could maintain retirement incomes without new taxes"

A key question that next month's election will decide - perhaps the key domestic policy question - is whether the size and role of the federal government should increase.

Nondefense spending and personal taxes collected by the federal government are now at all-time highs. Nevertheless, the massive budget surpluses that are predicted for the next decade are a powerful stimulus for new government spending.

Vice President Gore has proposed a wide range of new and expanded programs. Governor Bush has proposed relatively few and would use more of the budget surpluses to finance tax cuts.

The Gore campaign has tried to shift attention from this critical choice and to paint the vice president as the candidate of fiscal responsibility and national debt reduction. In reality, however, the Gore spending plan is likely to be at least as large as Bushs combined spending and tax program. And both candidates would still leave large budget surpluses in Social Security with which to pay down national debt.

More specifically, the Congressional Budget Office estimates that budget surpluses over the next 10 years will total $4.6 trillion. Of this, $2.4 trillion arises in the Social Security program, because payroll tax receipts will still exceed benefits to current retirees. That leaves an "on budget" surplus of $2.2 trillion over the decade.

The Congressional Joint Committee on Taxation calculates the Bush tax cuts would cost $1.3 trillion over 10 years. Adding on Bushs proposals for Medicare, education, defense, and other government spending would bring the total to less than $2 trillion. In other words, the budget surpluses are large enough to devote $2.4 trillion to Social Security, to pay for the Bush tax and spending plans, and to have several hundred billion dollars left as a cushion.

The size of the Gore spending program is hard to estimate, because it depends on how many people take advantage of the new programs he would create, including the "targeted tax cuts." These are not cuts in tax rates, but are really spending plans done through the tax laws - like the refundable tax credit for families that use commercial day care, regardless of whether they actually owe any taxes.

The Gore campaign estimates that the sum of his proposals would cost about $1.5 trillion, leaving a $700 billion cushion. The Senate Budget Committees staff estimates the Gore plan would cost $2.7 trillion, or $500 billion more than the available surplus. If thats correct, it is Gore who has by far the larger package and the smaller debt reduction.

Even with large tax cuts or spending, there would still be substantial reduction of the national debt. Compared to the Congressional Budget Office estimate of a $4.6 trillion budget surplus over the next 10 years, the Bush and Gore plans would still reduce the national debt by about $2 trillion, or more than half of the current $3.5 trillion national debt. The reduction would cut interest rates, provide room for increased business investment, and reduce dependence on foreign capital.

The Bush plan also provides for Social Security reform that will help to finance benefits after the baby boom generation begins to retire in the next decade.

Individuals would be able to shift a portion of their Social Security payroll taxes into new Personal Retirement Accounts that would supplement the traditional pay-as-you-go benefits financed by the payroll tax. Although that will mean less buying back of government bonds for the Social Security trust fund, the national debt 10 years from now would still be cut to less than 20 percent of that years GDP, a lower figure than we have seen since before World War II.

More importantly, the Social Security Personal Retirement Accounts would give individuals higher returns and a more secure retirement than with the existing Social Security program.

The budget surpluses projected by the Congressional Budget Office are based on very conservative assumptions that real GDP will increase at only 2.75 percent a year - below the growth rate of the past 20 years and only about half the current years rate. If growth over the next decade exceeds the official forecast, the budget surpluses will be even larger, and the national debt pay-down even greater.

Those who argue a large tax cut would overstimulate the economy forget three things.

First, the tax cuts would be phased in over several years. What matters, therefore, is not the pace of the economy now but over the next decade.

Second, the economy is slowing down. Most private estimates for 2001 and 2002 are for overall growth in spending of only about 3 percent. If productivity gains continue to be strong, that slower growth will cause rising unemployment. In that context, some fiscal stimulus would not be a bad thing.

And third, tax policy should be based on long-run incentives and not the temporary fiscal impact.

The Bush tax cut reduces high marginal tax rates that discourage work, saving, and risk-taking. It raises the standard of living of every taxpayer. And it prevents the increases in revenue that would simply finance yet more government spending.

Martin Feldstein, former chairman of the Council of Economic Advisers, and his wife, Kathleen, also an economist, write frequently together on economics.