Perspective Featured

9:52am EDT July 22, 2002

Since we’re going to hear and read this fall lots of propaganda about the pluses and minuses of federal tax cuts, we should remain mindful of several important facts.

First, Congress has already locked up $2 trillion of the next decade’s projected $2.9 trillion federal budget surplus to assure long-range financial stability for Social Security and Medicare. The tax cut debate is not about protecting Social Security or Medicare. The needed funds are set aside in a statutory “lock-box” that ensures it will not be spent on other programs or used for tax reductions.

Second, $2 trillion for Social Security and Medicare will allow the U.S. Treasury to reduce federal debt and restructuring of remaining borrowing at more advantageous terms. This is happening already.

Third, if Social Security and Medicare are assured, one of three things will happen to the predicted $900 billion additional federal surplus: (1) It will be spent by the federal government; (2) It will be returned to taxpayers; or (c) It will disappear because the economy slows.

About (1), note that the current fiscal year’s actual surplus — about $87 billion — has already been soaked up by additional federal spending. This is to be expected. Congress and the White House will find ways to spend every available nickel of any surplus.

About (2), several years of strong economic growth and the federal budget surplus itself owe themselves to American workers’ and businesses’ steadily increasing productivity. Is a reward for this hard work appropriate? Wouldn’t the right reward be one that would also bolster growth and productivity gains?

Finally, if the last scenario kicks in, the disappearance of projected surpluses would affect the $2 trillion set aside for Social Security and Medicare.

This brings us to the fundamental question: Do we think the economy will be more likely to thrive because the federal government spends $900 billion more over the next decade, or because Americans get a large tax refund?

Federal Reserve Chairman Alan Greenspan says the worst economic option is for Congress and the White House to spend federal budget surpluses. Unless there is a tax cut this year, you can bet the ranch and the dog that every single penny of the next decade’s predicted surpluses (and probably more) will be “disappeared” by this time next year.

Cliff Shannon is president of SMC Business Councils. Reach him at (412) 371-1500.