- The Washington Times - Friday, May 5, 2000

The Treasury Department has just announced a record-setting government debt paydown plan that will redeem $185 billion of outstanding bills, notes and bonds this spring, more than 60 percent above what they retired the same time last year. While this blockbuster plan has sent a legion of Wall Street economists back to their drawing boards in order to figure out the interest rate implications (if any), the real significance of the announcement rests with its impact on budget politics and policy.

Namely, what to do with the overabundant inflow of tax revenues that are filling the Treasury coffers. When properly adjusted, April 2000 tax collections will be 14 percent higher than April 1999. Non-withheld receipts from stock market-driven capital gains look to be rising about 10 percent.

Even assuming the usual late-year spending excess that has come to be a hallmark of recent budget policies, the fiscal 2000 budget surplus will run upward of $230 billion, about $63 billion higher than official government estimates. And this staggering overall surplus will leave about $70 billion in the so-called on-budget surplus, i.e., the non-Social Security portion.

Perhaps Mr. Greenspan will think about this in the run-up to the next meeting of the Federal Open Market Committee. For every time he tightens the policy noose around the economy, he threatens to block the incredible budget surplus story.

Economic growth solves a lot of problems, including government fiscal problems. In recent months, our central bank has worried out loud that too much stock market wealth, job creation, productivity and economic growth will cause inflation. But that's just speculative Phillips Curve hypothesizing. Actual core inflation rates have barely budged even after nine years of cyclical growth. Whoops. Make that 18 years of consecutive prosperity.

On the other hand, we know empirically that more people working, investing, innovating and risk-taking pay more taxes on their successful effort. Lots more taxes. At current tax rates which are vastly too high and complex our economic prosperity is generating a progressively cascading volume of tax overcollection.

That is a fact, not a forecast. We know it is a fact because the government's cash lockbox is overflowing. Mr. Greenspan is a great fan of budget surpluses, as he has so testified before Congress on numerous occasions. Surely he realizes that budget surpluses are borne of economic growth. Cutting back on growth, however, will reduce the very surpluses he apparently cherishes.

So what will Washington do with the windfall? Seventy billion dollars is a big sum, even by inside-the-Beltway standards. There is no rainy day money market fund for the federal government. It will either be spent, thereby enlarging the government's size and scope, or returned to the 130 million working Americans who earned it in the first place. (Treasury debt redemption and buybacks are scored as a means of finance, paid for out of rising cash balances.)

Polling data suggest that until recently 50 percent of the public haven't believed budget surpluses truly exist. But this year's eye-catching total will change that. Overcharged taxpayers will demand a rebate and a big change in Washington policy thinking. Welcome to the era of surplus politics.

If across-the-board relief from high personal tax rates is not feasible this year, then how about a simple one-time rebate check that would be paid to all payroll tax contributors?

The fiscal year books close Sept. 30. Within a week or two the government will know exactly what its financial position is. That's when the checks should be mailed out.

A $70 billion operating surplus would permit about $500 per working American. Well worth the while. It might not be optimal tax policy, but it would send the right message that money placed in private hands will be more efficiently used than if those surplus funds are left in the public trough.



Lawrence Kudlow is chief economist of CNBC.com and Schroder & Co. Inc.

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