top of page

The Compact Solution to the Federal Debt Rubik's Cube

Debt is the problem. More than any other policy, unlimited debt spending is the source and enabler of an ineffective, overstretched and overreaching federal government. This is because unlimited debt spending creates the illusion of limitless resources; and when the illusion of limitless resources exists, it becomes next to impossible to persuade politicians that the federal government should have a limited and sustainable role in our lives. Throttling back limitless debt spending is the only way to create a structure that forces a debate over the proper priorities and sustainable functions of the federal government that will otherwise be easily evaded.

Of course, there is no point in just having a theoretical debt limit. A fundamental problem with the debt limits and balanced budget requirements of all 49 states is that creative legislatures and executives have found ways around them. Even so, the Compact's BBA cannot be gamed using any of the usual tactics. This is because unlike any other debt limit, apart from financing spending "exclusively" from an authorized line of credit of a specific amount, the BBA requires total federal outlays never to exceed total receipts at any point in time; and it defines “receipts” narrowly to include tax receipts and their equivalent, but to exclude proceeds from the incurrence of debt and all types of liability. This means that whether a balance between total federal outlays and receipts exists will be entirely cash-based and not dependent on budgeting estimates that can be cooked.

Moreover, under this BBA, federal expenditures cannot be supported by floating short term obligations (like the IOUs and warrants recently used by California or Illinois) or by merely printing or minting money (like President Obama’s $1 trillion coin). This is because both of which are classified as debt or liabilities and, therefore, excluded from the BBA’s definition of “receipts” to which total federal outlays would be restricted.

Defining the requisite balanced budget requirement in this way also ensures that it will not be gamed by common accounting gimmicks, such as delaying payment of amounts due (called “rollovers”) or floating checks, warrants or IOUs, because these tactics cannot alter the BBA’s hard and fast requirement of total spending never exceeding total tax receipts (or their equivalent) at all times.

The only exception from the BBA’s strict requirement that total spending never exceed tax receipts (or the equivalent) is that any excess spending must be financed "exclusively" by full faith and credit debt, i.e. treasury bonds, which is subject to a hard constitutional limit that can only be increased with the approval of a majority of state legislatures.

Far from being a deviation from the principles of a balanced budget amendment, the Compact's BBA thereby incorporates the discovery that there is no way to have a truly non-gameable definition of a “balanced budget” that requires spending never to exceed taxation without a debt cushion to handle volatility and mismatches from day to day between tax revenues and spending. A revolving line of credit, so to speak, is the price of a definition of a balanced budget that cannot be gamed.

Enforcing a balanced budget that channels any borrowing exception to transparent bonding, which is subject to a hard constitutional limit on the amount of credit available, is far better than the status quo of limitless borrowing coupled to budgetary gamesmanship.

The Compact’s BBA also rightly prioritizes limiting the debt over limiting current taxation. There is no trade-off between holding the line on taxation and enforcing a BBA because debt is taxation. Debt is taxation in the form of inflation because debt increases the money supply when it is purchased by the Federal Reserve, generating a price level that is necessarily higher than it would otherwise be. Debt is also taxation for future generations who are stuck with the bill for our current spending—assuming the debt is repaid. Limiting debt therefore limits taxation.

At worst, the Compact's BBA forces a choice between two kinds of taxation (taxing current versus future generations), and an absolutist preference for one kind over the other does not make sense to us. But if we have to choose, it is better to choose to risk new taxes today as a consequence of limiting debt instead of new taxes tomorrow as a consequence of limitless debt because there is no effective political check on shifting the costs of our policies to non-voting future generations through debt. Therefore, the BBA rightly allows for the possibility of net increases in tax revenue by Congress through simple majority approval so long as the net increase arises from ditching the income tax code in favor of a sales tax or reducing or eliminating tax exemptions, deductions and credits.

Still, in the final analysis, the Compact's BBA will still deter excessive tax increases and generate better tax policy than would the status quo. The requirement of supermajority approval for income and sales tax increases, with simple majority approval retained for completely junking the income tax code in favor of a sales tax, or eliminating exemptions, deductions and credits, or increasing tariffs or fees will be a powerful force for reforming our tax code. It forces most attempts to raise taxes to do so either in a more voluntary manner through a sales tax, tariff or fee, or more fairly through a flatter income tax; both of which are more conducive to economic growth.

In short, the Compact's Balanced Budget Amendment is the solution to our Nation's fiscal problems. It is time for the States to Compact for a Balanced Budget Now!

* * *

by Nick Dranias

* * *

Featured Posts
Recent Posts
Follow Us
  • Wix Facebook page
  • YouTube App Icon

Visit CFA on Facebook

Get Educated about CFA on YouTube

Search By Tags
No tags yet.
bottom of page