BPEA | 2002 No. 1

The Tax Smoothing Implications of the Federal Debt Paydown

George J. Hall and
George J. Hall Yale University
Stefan Krieger
Stefan Krieger Yale University
Benjamin M. Friedman and
Benjamin M. Friedman Harvard University
Mark Gertler

2000, No. 2

AFTER NEARLY THIRTY straight years of deficit spending, the fiscal position
of the U.S. government has experienced a dramatic turnaround. In
fiscal years 1998 and 1999, for the first time since the 1950s, the federal
government ran back-to-back budget surpluses. With the government no
longer a net borrower, the Treasury has started paying down the federal
debt: debt held by the public fell from $3.5 trillion in March 1998 to
$3.0 trillion in July 2000. And both the Office of Management and Budget
(OMB) and the Congressional Budget Office (CBO) are forecasting
that these surpluses will continue over the next decade,1 in amounts large
enough that the public debt will be fully redeemed in 2012. Although these
official forecasts may prove too optimistic, it is reasonable to expect that
the quantity of publicly held debt will shrink considerably over the next