January 23,2002

Grassley Statement on Budget Outlook, Tax Cuts

With today’s announcement that the federal government is once again facing near-term budgetdeficits, we’re going to hear a lot of talk from the critics about the need to postpone or even repeallast year’s bipartisan tax cut.

The critics say we should revisit the tax cut for two reasons. First, they claim the tax cut isresponsible for our return to budget deficits. Second, the critics claim the tax cut will jeopardize ourlong-term economic growth. Let’s consider each of these claims in turn.

According to the Congressional Budget Office’s projections, the tax cut is responsible for lessthan 15 percent of the reduction in this year’s surplus and less than 40 percent of the reduction insurpluses over the next ten years. The slowdown in our economy and the additional spending enactedlast year are responsible for most of the deterioration in our budget outlook.

The second criticism is that the tax cut will reduce the surplus, thereby exerting upwardpressure on interest rates, and thus reduce future economic growth. A recent report by the JointEconomic Committee, however, concludes there is no evidence to support this criticism. Accordingto the JEC, “empirical studies on interest rates have uniformly failed to find any statistically significantrelationship between interest rates and the budget balance of the U.S. government.” This result islikely due to the fact that the deficits we have seen in the past were not large enough to affect interestrates given the overall of our financial markets.

If the tax cut is not responsible for rising deficits and higher interest rates, why do the criticsstill complain? One reason they want to delay or repeal the tax cut is because they want to spend themoney. Some critics have already announced their plans to spend the tax cuts. As more of theirspending plans become public, it will become obvious their cries for “fiscal discipline” are nothingmore than crocodile tears.

In addition to the critics who want to spend the tax cut, there are also critics who insist wecannot afford the tax cut because our long-term budget projections show federal spending will exceedrevenue by 25 percent within 50 years.

To argue we cannot afford a modest tax cut today because we will need a huge tax increasein the future is to ignore the obvious. Congress cannot provide more government than taxpayers arewilling to pay for. Throughout our country’s history the federal government has never taken morethan one-fifth of our nation’s income in taxes. If we are not willing to pay 25 percent more forgovernment, why should we expect our children and grandchildren to do so? Our challenge todayis to get beyond the rhetoric and begin to make government affordable once again.