Catastrophic Deficits Loom on Horizon

Article excerpt

President Clinton says "the era of big government is over." Yet, during the first three years of his administration, actual federal tax revenues rose $322 billion to $1.4 trillion, a 29 percent increase. In dollar terms, that was the biggest tax increase for a comparable period in the nation's history.

Federal tax collections were $5,365 per person in the year ended June 30, 1996, up 25 percent from the average of $4,293 in 1992, just before Clinton took office. In the same period, compensation per worker (wages, salaries and benefits) rose in the neighborhood of 10 percent.

Higher taxes clearly played a key role in reducing the federal deficit from $327 billion in 1992 to $115 billion in the year ended in the second quarter of 1996. Meanwhile, the Treasury's operating surplus (revenues minus outlays except net interest) soared to a record $125 billion in this period, from a deficit of more than $100 billion.

However, without basic changes in programs for the elderly, these gains will be short-lived. Under present law, catastrophic budget deficits loom just over the budgetary horizon. Whatever else they may expect to debate in the presidential campaign, both Bill Clinton and Bob Dole plainly hope to avoid this issue.

Social Security and Medicare should be subject to the same income tests as other Washington programs so the wealthy do not get government handouts. Social Security should shift from pay-as-you-go financing, which undermines national saving and investment. Instead, at least one-third of Social Security should be on the same basis as the typical private pension plan, which makes investments in productive assets and then pays benefits from earnings on those assets.

About $180 billion of Clinton's $322 billion tax increase has gone toward reducing the federal deficit. Federal transfer payments -- which take income from people who work to give to people who do not -- accounted for roughly $130 billion, while interest on the debt rose $40 billion. Other federal outlays fell, with deep cuts in Pentagon spending partly offset by modest gains elsewhere.

Washington is focusing on welfare reform. Voters have rejected the perverse incentives in the current system -- incentives that create the problems the programs are supposed to solve. More important, welfare is a metaphor for the much larger issue of how to rein in growth of government transfers.

Programs that actually help poor people (means-tested entitlements and Medicaid) are less than 20 percent of the $1 trillion-plus that federal, state and local governments spend each year for transfer payments. In 1996, the Treasury will finance more than 80 percent of total transfers with checks direct from Washington and through grants to states and localities. …