April 1, 1998

Spending the Surplus: Tax Reduction Options

Download Background Paper No. 24

Background Paper No. 24

Executive Summary On January 7, 1998 the Congressional Budget Office (CBO) issued revised estimates of the deficit for fiscal year 1998 that showed that for the first time in 30 years the federal budget was effectively in balance. The deficit for fiscal year 1998 was projected to be $5 billion, a tiny fraction of the $1.7 trillion Federal Budget. The CBO projected small budget surpluses beginning in 2001, rising as high as $13 8 billion by 2008. In total, over the next ten years, the CBO has predicted a $665 billion dollar surplus. By early April, the CBO was predicting that there would be a budget surplus of $18 billion by the close of fiscal 1998.

The federal budget has come into balance sooner than expected largely because tax revenues have grown at a faster pace than the rest of the economy for three consecutive years. Most of the unexpected revenue gain in 1997 came from individual income taxes. This unexpectedly good news about the federal budget deficit has renewed the debate between Congress and the President over fiscal policy. There are three options for using the surplus: additional federal spending, repayment of the debt, and tax relief. The President’s recently released budget proposes both increasing spending and retaining any surpluses to bolster the Social Security trust fund.

While drafting this year’s Budget Resolution, Members of Congress are currently trying to decide on what mix of tax cuts, debt retirement, and spending to pursue with any surplus. Some tax cut proposals are revivals or extensions of tax provisions that were excised from or modified by last year’s budget agreement, such as the expansion of Education IRAs and the elimination of the “marriage penalty.” Others, such as across the board marginal rate cuts, have been mainstays of tax reform advocates for at least two decades.

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