Back on 3 February 2011, a number of Republican party members in the U.S. Senate introduced Senate Joint Resolution 5, which proposes to amend the U.S. Constitution to require the U.S. Congress to balance the annual budget of the U.S. federal government. The resolution has since been signed on to by all the Republican members of the U.S. Senate.

It's a good sentiment, and it has some points to recommend it, however it's got some real world problems.

Here's the text of the proposed amendment, along with our comments:

Section 1. Total outlays for any fiscal year shall not exceed total receipts for that fiscal year.

That really sounds good, doesn't it? In theory, that's all the U.S. Congress would ever need to do to balance the U.S. government's budget. But as Yogi Berra observed, "In theory, there is no difference between theory and practice. But, in practice, there is."

Section 2. Total outlays shall not exceed 18 percent of the gross domestic product of the United States for the calendar year ending prior to the beginning of such fiscal year.

We like the 18% of GDP figure - the long term average of total federal receipts since 1946 is 17.8% of GDP, so this figure is certainly in the right ballpark. And even though the amount of the federal government's total receipts varies annually with economic booms and recessions (the standard deviation of total receipts since 1946 is 1.2% of GDP), the combination of positive and negative deviations from this average amount on account of this variation would largely balance out over time.

The big problem though, as identified by Bruce Bartlett, is that there isn't a standard legal definition of Gross Domestic Product. Although not insurmountable, there are a lot of games that politicians and bureaucrats could play with the vagueness inherent in the law with respect to GDP to make the requirement pretty meaningless.

Another problem with this section of the proposed amendment is that it keeps the U.S. Congress from knowing what GDP of the previous calendar year is until the end of March of the next year, thanks to the Bureau of Economic Analysis' revision process. That's a long time to go without knowing how much spending will be allowed under the amendment's restrictions.

Section 3. The Congress may provide for suspension of the limitations imposed by section 1 or 2 of this article for any fiscal year for which two-thirds of the whole number of each House shall provide, by a roll call vote, for a specific excess of outlays over receipts or over 18 percent of the gross domestic product of the United States for the calendar year ending prior to the beginning of such fiscal year.

This section of the proposed amendment would allow the U.S. Congress to override the first two sections with a two-thirds vote, allowing the federal government to deliberately run a deficit if enough elected politicians sign onto it. It's reasonable, since there may be situations in which the U.S. Congress may overwhelming decide to spend far more money , but has the same "GDP" vagueness of meaning problem we noted earlier.

Section 4. Any bill to levy a new tax or increase the rate of any tax shall not become law unless approved by two-thirds of the whole number of each House of Congress by a roll call vote.

This section of the proposed amendment really isn't required to produce a balanced budget. Nice idea though, although it obviously wouldn't cover so-called fees or "spending reductions in the tax code," or other slippery terminology that politicians and bureaucrats might adopt to get around the requirements of having a two-thirds vote whenever they really would rather not.

Section 5. The limit on the debt of the United States held by the public shall not be increased, unless two-thirds of the whole number of each House of Congress shall provide for such an increase by a roll call vote.

This is another section that sounds good in theory, but not so much in practice. It applies only to the portion of the U.S. national debt that is "held by the public", which is significantly less than the "public debt outstanding", which would cover the whole ball of wax. We're not fans of escape valves for politicians and bureaucrats, which they could easily get around by playing with the "intragovernmental holdings" portion of the national debt, where the government hides how much it's really borrowing by making it look like it's only borrowing money from itself.

Section 6. Any Member of Congress shall have standing and a cause of action to seek judicial enforcement of this article, when authorized to do so by a petition signed by one-third of the Members of either House of Congress. No court of the United States or of any State shall order any increase in revenue to enforce this article.

This section provides the teeth for enforcing the amendment's requirements, while also preventing judicially-ordered tax increases as a potential remedy should such a case be brought to court.

Section 7. The Congress shall have the power to enforce this article by appropriate legislation.

This section is pretty "boilerplate" in its nature, as it provides for the U.S. Congress to develop and provide for whatever mechanisms it chooses to enforce the proposed amendment.

Section 8. Total receipts shall include all receipts of the United States except those derived from borrowing. Total outlays shall include all outlays of the United States except those for repayment of debt principal.

This section provides the definition for how the U.S. Congress intends the words "total receipts" and "total outlays" will be interpreted by U.S. courts. Note that these definitions would allow "total outlays" to exceed 18% of GDP, so long as the portion that would exceed that threshold consists of the principal portion of the nation's debt payments.

Section 9. This article shall become effective beginning with the second fiscal year commencing after its ratification by the legislatures of three-fourths of the several States.

This final section is the constitutional boilerplate for the timing of when the amendment would officially take effect.

Now, here's how we might rewrite the proposed amendment to be more practical and to the point:

Section 1. Total outlays for any fiscal year shall not exceed one hundred five percent of the total receipts for the previous fiscal year.

Section 2. The Congress may provide for suspension of the limitations imposed by section 1 of this article for any fiscal year for which two-thirds of the whole number of each House shall provide, by a roll call vote, for a specific excess of total outlays over one hundred five percent of the total receipts for the previous fiscal year.

Section 3. The limit on the public debt outstanding of the United States shall not be increased, unless two-thirds of the whole number of each House of Congress shall provide for such an increase by a roll call vote.

Section 4. Any Member of Congress shall have standing and a cause of action to seek judicial enforcement of this article, when authorized to do so by a petition signed by one-third of the Members of either House of Congress. No court of the United States or of any State shall order any increase in revenue to enforce this article.

Section 5. The Congress shall have the power to enforce this article by appropriate legislation.

Section 6. Total receipts shall include all receipts of the United States except those derived from borrowing. Total outlays shall include all outlays of the United States except those for repayment of debt principal.

Section 7. This article shall become effective beginning with the second fiscal year commencing after its ratification by the legislatures of three-fourths of the several States.

Note that we locked the amount of total outlays to the previous year's tax receipts in our version of a balanced budget amendment. This provides an easy point of reference that already has a legal definition provided for in the body of the amendment itself. We selected 105% to account for the typical historic economic growth and inflation that would affect the potential total receipts figure for the fiscal year for which the U.S. Congress would be creating a budget, although the amendment writers could select a different figure to use in a final version of this proposed amendment.

We'll observe in closing that they could just as easily select 100% of the previous year's total receipts and not have to worry much about hitting any national debt reduction goals they might set.

Labels: national debt, taxes

- posted by Ironman at 7:27 AM | Permalink | Home |