What To Do With the Budget Surplus Jude Wanniski March 18, 1998

Memo To: Newt Gingrich, Trent Lott
From: Jude Wanniski
Re: Budget Surplus

In the current debate over how to dispose of the looming budget surplus, I urge you to fight off all attempts to apply any of it to paying down the national debt. Until we remove as many of the obvious impediments to growth and productivity that have crept into the tax system, paying off debt should be looked upon as a feeble investment in the national economy.

There are legitimate demands to increase federal spending where it has been especially starved during recent years of austerity — on federal infrastructure, for example. But it makes no sense to buy back government bonds that we are floating at less than 6%, when tax rates on incomes and capital gains are discouraging economic expansion that would produce a much higher return.

Fed Chairman Alan Greenspan does favor paying down the debt, but he also continues to make the argument that there should be no federal capital gains tax -- that it is the worst way to raise revenue. He would not hesitate to lower or eliminate the tax, knowing it would produce a much higher rate of return than liquidating government bonds. In the same way, before there is any talk of paying down debt, both the Clinton and the Bush income surtaxes, of 1993 and 1990, should be repealed.
When you don't know what to do, Newt/Trent, it makes perfect sense to divide the loaf three ways, but I think the American people gave your party control of Congress in 1994 and again in 1996 because they believe you are more likely to cut tax rates than is the other party. You owe it to them to make critical decisions on priorities instead of taking the line of least resistance.

When a private corporation pays down debt or buys back equity, it is essentially telling the market that it has no good ideas on how to invest it with potentially higher returns. There will of course come a point when we run out of ideas on which tax rates are holding us back, but until we get there, all available resources should be devoted to finding that point.