Evaluating the Budget Surplus and Tax Policy Options

Mr. Chairman and Members of the Committee:

Thank you for giving me the opportunity to discuss the budget outlook and the options for tax policy. My testimony is divided into two sections. The first provides a summary; the second provides the background analysis that supports these views.

Summary

1. The Budget Outlook

The most recent Congressional budget Office baseline forecast projects cumulative surpluses of $5.6 trillion between 2002 and 2011. But there is really only $1.7 trillion or less that can be thought of as “available” for new tax cuts or new spending, under responsible budgeting practices and realistic forecasts of tax and spending policies.

Almost 60 percent of the projected surplus is due to accumulations in retirement trust funds. No financially responsible firm would consider its pension reserves as a source of financing for current operating expenses, and neither should the federal government. Both Houses of Congress have shown overwhelming support for protecting the social security and medicare trust funds, because they represent current tax collections that are committed to future uses. Cordoning off social security reduces the available surplus to $3.1 trillion. Protecting the Medicare trust fund reduces the amount to $2.7 trillion. Protecting the pension reserves of government military and civilian workers—which makes sense for the same reasons as protecting social security and medicare—would reduce the available surplus to $2.3 trillion…