Unbalanced amendment - Balanced Budget Amendment

Reason, June, 1995 by Alan Reynolds

When people say they want the government to live within its means, they really mean within their budgets as tax-payers--don't spend more than we can afford. "Deficit spending" is a metaphor for excess spending, for a government that costs too much, delivers too little to those who pay the bills, and sends too many checks to people who neither work, save, support their own children, nor plant crops.

Unfortunately, the Balanced Budget Amendment says nothing about how much the government can take from Jones and give to Smith. It does not constrain federal spending in any respect. Instead, it focuses entirely on how the spending is financed--by borrowing or taxing--and is silent on whether cutting spending or increasing taxes is the better policy.

But higher tax rates have quite different effects on the economy than does lower spending. Cutting federal purchases can free up scarce labor and capital that the private sector needs to keep expanding. Cutting transfer payments can improve incentives to work, save, support your own children, or plant crops.

Far from being equivalent to such spending restraint, higher tax rates would have, and are having, the exact opposite impact. For instance, growth in the number of job seekers has been very slow since the tax hikes of 1990-93, and personal savings have fallen. Reasonably decent economic growth may not be a sufficient condition to minimize deficits, but it is a necessary one.

Remember, the Balanced Budget Amendment does not ever require that the actual budget be balanced. It only requires that next year's budget estimates be balanced--that estimated revenue equal estimated spending. Because that requirement makes no distinction between restraining federal spending and raising tax rates, it encourages the illusion that higher tax rates are the politically easy way out of any future budget squeeze.

On paper, it is always easy to balance next year's budget the way that Herbert Hoover did in 1932: Keep raising tax rates and assume this has no bad effects at all on the economy or on tax avoidance. This is, in fact, the way revenue estimates are prepared. And estimates are all that are required to comply with the amendment.

Because the amendment covers only the immediate future--next year--it virtually mandates a short-term approach that continually neglects festering long-term problems, such as the looming scarcity of younger workers to finance Social Security and Medicare for retiring baby boomers. Faced with a major crisis in next year's budget, it would be literally impossible to turn big spending programs around quickly enough to meet the deadline. That means suicidal, Hoover-esque tax increases would often be the only apparent solution available.

Big spending programs also have huge, well-organized interest groups to fight cuts. Tax increases, by contrast, can target different small groups each year--picking us off one by one. Look at the way the 1993 tax hikes were defended on the grounds that not many votes were involved, just a small percentage of "rich" families, or small businesses, or Social Security recipients.