National Debt Overkill

As published in The Washington Times, May 18, 2001

An important new white paper on the economy by Jack Kemp, published by, should be must reading for all Americans.

In “Tax Rate Reduction, the National Debt and Economic Growth,” Mr. Kemp demolishes the economics behind the sudden pell-mell rush in Washington to pay off the national debt as quickly as possible. The problem with that crusade is that trying to maintain a high surplus to pay off the entire debt over the next 10 years or so requires us to keep tax rates much higher than otherwise. The economic destruction of these higher rates far outweighs any economic benefits from paying off the debt.

As Mr. Kemp says, “It is counterproductive to keep tax rates higher than they need to be just so huge budget surpluses can be generated to retire the national debt. Debt retirement does not lower interest rates, nor does it increase national saving. Debt retirement does not strengthen Social Security. Debt reduction does not promote economic growth. Economic growth reduces the burden of debt. High tax rates do not promote growth they stifle it.”

Mr. Kemp unmasks the fallacy that eliminating the debt would reduce interest rates by noting that neither the Congressional Budget Office nor the Council of Economic Advisers are projecting a reduction in interest rates as a result of the enormous debt paydown over the next 10 years that Congress and the administration are now planning. The wide swings in deficits and surpluses we have experienced over the past 20 years do not correlate with interest rates, which are determined by time preferences of consumers, monetary policy, worldwide capital market flows, and other factors.

As Mr. Kemp notes, if we simply maintain a balanced budget in future years, the national debt would fall to 23 percent of gross domestic product (GDP) by 2011 and 18 percent by 2015. Such a minor debt is not an economic problem. The national debt was 60 percent of GDP in 1950 and just under 50 percent in 1960.

Indeed, federal bonds are used by the Fed to run the nation´s economic policy and are used by investors and businesses in a variety of economically useful ways. So paying off these bonds entirely is probably not desirable.

Trying to run huge surpluses to pay off the debt is, in fact, an illusion. The Left supports this now because it is desperate to keep the tax money in Washington until it can start spending it again. That has already begun to happen with the surpluses in the past few years.

Mr. Kemp rightly proposes instead that we simply maintain a balanced budget in future years, and use the surpluses to adopt a much larger tax cut and a bigger personal account option for Social Security.

This simply follows the lead of Ronald Reagan, who held the same views, saying, “I have always believed that government has no right to a surplus that it should take form the people only the amount necessary to fund the government´s legitimate functions. If it takes more than enough it should return the surplus to the people.”

Mr. Kemp´s paper lacks just one thing: specific proposals. The conservative movement needs a specific long term tax cut to advance, and a specific proposal on Social Security personal accounts it can work together to achieve.

While the flat tax is the ideal, perhaps a tax reform plan with three rates, 10 percent, 15 percent and 25 percent, would be far more feasible. The 10 percent and 15 percent rates would apply to middle class incomes. Capital gains would be taxed at 15 percent and indexed for inflation. The top corporate rate would be reduced to 25 percent as well. Depreciation schedules should also be accelerated.

On Social Security, we should allow workers to shift 5 percentage points of the payroll tax into their own personal investment accounts. For workers who did this over their entire careers, the account would replace half their current Social Security benefits. Workers who exercised the option for fewer years would retain a proportionally larger percentage of benefits under the current system.

Workers would be able to choose an investment company from a list approved and regulated by the government, and that company would choose the particular stock and bonds investments for them. The system would be backed up by a safety net guaranteeing that workers who exercise the account option would receive no less overall than currently promised Social Security benefits.

Private investment returns are so much higher than what Social Security offers that all workers will in fact end up with much higher benefits under this system. The tax cuts along with this Social Security reform would produce a more dramatic economic boom than anything we have experienced so far, a 21st century economic breakout.

Moreover, this would be the most dramatic shift of power from government back to the people in world history. It´s Power to the People, baby. That´s an agenda worth fighting for.

Peter Ferrara is associate professor of law at the George Mason University School of Law.