Politics & Policy

It’s the Spending, Stupid

Democratic PAYGO rules create a clear and present danger to limited government, national prosperity, and even equity.

With overwhelming Democratic support, the Senate recently passed a fix to the to the Alternative Minimum Tax — the tax that was designed to prevent a few millionaires from not paying any tax but now raises the taxes of millions of middle-class families. But the obstacle to passing a bill in the House to modify this unfair tax is a barrier of the Democrat’s own devise — the PAYGO rules. These rules require that tax cuts and new entitlements be “paid for” either by cutting other entitlements or raising taxes. The Democratic claim that these rules reduce the deficit by making sure that each successive Congress cannot bust the budget. In reality, these rules do a poor job at stopping excessive spending, but are very effective at preventing tax cuts of any kind, including simply fixing tax mistakes, like the ATM. Thus, the Democratic PAYGO rules create a clear and present danger to limited government, national prosperity, and even equity.

Even on their own terms the new PAYGO rules passed separately by the Senate and House in this Congress have many flaws. First, the PAYGO rules target only spending that is in new entitlement programs. As a result, the rules do not constrain the growth of old programs even if they are increasing at a rate far greater than inflation or government tax receipts. Even worse, the rules do not apply at all to discretionary spending, the kind of spending by which Congress funds government operations.

The rules also do not require Congress to consider the dynamic potential of tax cuts, which may in the long run cost much less than static projections indicate because they stimulate economic growth and thereby increase tax revenues. As a result, the PAYGO rules fail in their own professed objective of taking into account the actual budget impact of tax cuts. Instead, the rules systematically overstate their budget effect.

As deficient as the PAYGO rules are on their face, their structure reflects a deeper error — they place enormous obstacles in the way of tax cuts but allow large holes for unrestrained spending increases. Under the rules, Congress cannot pay for tax cuts with reductions in discretionary spending, but only with reductions in entitlement programs, which are notoriously hard to enact. In contrast, the rules place no restrictions at all on congressional decisions to increase discretionary spending.

This asymmetrical treatment of tax and spending is perverse, because it ignores what we know about the behavior of special interests in a modern democracy. Special interests are concentrated groups that wield undue influence on Congress, because their concentration allows them to organize in order to lobby. By contrast, the average citizen lacks incentives to lobby, because he is unable to meld like minded individuals into an effective legislative force. Even worse, it is not even rational for a citizen to exert the effort necessary to keep close tabs on spending his representative supports. Even if his representative consistently favors wasteful, the chances of an individual’s vote making a difference in a congressional election is less than being struck by lightning.

As a result, members of Congress pay far more attention to special interests than to ordinary citizens. And special interests focus more on securing spending programs than on cutting tax rates, because they can shape specific spending programs to deliver benefits only to themselves, but must share most tax rate reductions with large portions of the public. Consequently, Congress is likely to spend more than an informed public would want, but not to cut taxes beyond what that public would desire.

A superior legislative rule to respond to this political reality would be one requiring a sixty percent supermajority to enact any spending law. Such a rule would constrain the power of special interests, because it would make it more difficult for Congress to spend. The one difficulty with this sixty percent spending supermajority rule would be that a minority could threaten to oppose any spending and thereby risk shutting down the government. This leverage could even be used counterproductively by special interests and their big spending allies to insist on higher spending. A better rule would permit Congress by a simple majority to spend no more than 90 or 95 percent of last year’s spending — and thereby avoid a government shutdown — but require a supermajority for higher spending. That kind of rule would limit government spending, thus tempering deficits while preserving the conditions for economic growth.

These spending rules would be far more effective if each chamber made its rule difficult to waive. Here the House, which regularly waives rules by a majority vote, could learn from the Senate which permits waiver of its budget rules by only 60 senators, thus generally requiring bipartisan support. The House does not yet have a tradition of bipartisan decision-making, but the enforcement of rules against excessive spending would be a good place to start.

The current ATM problem is only the beginning of the bad policies that PAYGO will embed into law or make harder to fix. The PAYGO rules will discourage tax cuts and sustain an excessive level of spending. Majorities can best protect their pocket books by insisting on enforceable supermajority rules that help Congress choose spending levels that reflect the values of the majority rather than of special interests.

John O. McGinnis is a professor of law at Northwestern University and Michael B. Rappaport is a professor of law at the University of San Diego.


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