Fashioning A Tax Cut Trigger: Economic Issues

Fashioning A Tax Cut Trigger: Economic Issues

Order Code RL30948
CRS Report for Congress
Received through the CRS Web
Fashioning A Tax Cut Trigger:
Economic Issues
Updated January 29, 2002
Marc Labonte
Economist
Government and Finance Divison
Congressional Research Service ˜ The Library of Congress

Fashioning A Tax Cut Trigger: Economic Issues
Summary
Congress is currently considering economic stimulus bills in response to the
recession. Some members are concerned by the re-emergence of a federal budget
deficit, and the possibility that these bills would make the deficit larger after the
recession has ended. In addition, a large tax cut was passed in June 2001, the
Economic Growth and Tax Relief Reconciliation Act (P.L.107-16), and the
reductions in tax rates in this law will be phased in over several years.
Several Members of Congress are interested in linking a “trigger” policy to these
tax cuts, as recommended on several occasions by Alan Greenspan, Chairman of the
Federal Reserve. Trigger policies would make the enactment of each year’s phase-in
contingent upon achieving yearly budget surplus or debt reduction targets. In other
words, the phase-in would occur only if the surplus were large enough to make it
affordable in the eyes of trigger proponents. They also note ways in which actual
budget outcomes are likely to deviate from the baseline assumptions, due to both
policy changes and unrealistic baseline assumptions.
A trigger policy has several interesting economic implications:
! A simple trigger would be pro-cyclical. That is, it could prevent tax cuts from
occurring during recessions, thus undesirably reducing aggregate spending
further. More complexly crafted triggers may be able to take this problem into
account.
! Most of the major provisions of P.L.107-16 are phased in by 2006. But 84%
of the on-budget surplus occurs from 2007-2011. Thus, a trigger tied to
P.L.107-16 may be unable to prevent the erosion of the bulk of the surpluses.
! Baseline forecasts are uncertain, and they become more error-prone when
forecasted further into the future. While a trigger may be meant to compensate
for this uncertainty, the mechanics of tying a trigger to an uncertain forecast
can lead to unexpected outcomes. Notably, the choice of what target to link
the trigger to leads to different budgetary outcomes if surpluses turn out to be
smaller than forecasted.
! Some proponents of a tax cut who hope that it will increase long run growth
by increasing saving and work incentives fear that a trigger will create
uncertainty in decision making that will negate the tax cut’s saving and labor
effects.
The report also offers an overview of the political issue concerning whether
triggers can be circumvented through parliamentary maneuvers in the event that a
target is missed. Critics claim that this has occurred when mechanisms similar to
triggers have been used in the past. They fear that if this is the case, the trigger will
be rendered ineffective.
This report will be updated as events warrant.

Contents
Would a Trigger Be Pro-Cyclical? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
How Long Can the Trigger Effectively Last? . . . . . . . . . . . . . . . . . . . . . . . 3
Might a Trigger Policy Fail for Political Reasons? . . . . . . . . . . . . . . . . . . . 4
Uncertainty in Budget Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Should a Trigger Target the Past, Present, or Future? . . . . . . . . . . . . . . . . 5
Would a Trigger Create Uncertainty in Decision Making? . . . . . . . . . . . . . 8
What Number Should Be Targeted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1: Comparing the Baseline Projection with the Administration Tax Cut . . 4

Fashioning A Tax Cut Trigger:
Economic Issues
Congress is currently considering economic stimulus bills in response to the
recession. Some members are concerned about the re-emergence of a federal budget
deficit, and the possibility that these bills would make the deficit larger after the
recession has ended. In addition, a large tax cut was passed in June 2001, the
Economic Growth and Tax Relief Reconciliation Act (P.L.107-16), and the
reductions in tax rates in EGTRRA will be phased in over several years.
Several Members of Congress are interested in linking a “trigger” policy to these
tax cuts, as recommended on several occasions by Alan Greenspan, Chairman of the
Federal Reserve. Trigger policies would make the enactment of each year’s phase-in
contingent upon achieving yearly budget surplus or debt reduction targets.1 In other
words, the phase-in would occur only if the surplus were large enough to make it
affordable in the eyes of trigger proponents. Since most of the provisions of the
economic stimulus bills are temporary, it is more likely that a proposed trigger would
be applied to EGTRRA. A primary purpose of a trigger is to allow some portion of
the surplus to be maintained if economic projections turn out to be overly optimistic
or if future policy decisions make the tax cuts unaffordable. They also note ways in
which actual budget outcomes are likely to deviate from the baseline assumptions, due
to both policy changes and unrealistic baseline assumptions.2
This report considers several interesting economic implications of formulating
a trigger policy. These include the pro-cyclicality of a trigger policy, how the phase-in
provisions of the tax cut correspond with the forecasted surpluses, political
considerations concerning a trigger’s effectiveness, the uncertainty inherent in budget
projections, the policy implications of choosing different budgetary figures to target,
and how triggers may affect individuals’ decision-making. All of these considerations
point out the complexity of designing an effective trigger.
Would a Trigger Be Pro-Cyclical?
Although policy decisions ultimately determine the budget balance, the budget
surplus is also extremely sensitive to economic factors like growth, inflation, and
1 Different trigger policies target different variables. Some target the size of the surplus, some
target the level of the publicly held national debt, and some target interest payments on the
national debt. In practice, some variables may prove to be a more direct way to accomplish
one’s goals than others since each is sensitive to somewhat different factors. For the sake of
simplicity, this report will assume that the size of the surplus is being targeted, unless
otherwise noted.
2 See CRS Report RL30901, Projecting the Surplus: A Discussion of Issues, by Marc
Labonte and Philip Winters.

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unemployment. A trigger policy that does not make a distinction between whether
changes in the surplus are being driven by automatic budget stabilizers or policy
changes is open to the criticism that it would be pro-cyclical. How large are these
automatic stabilizers? The Congressional Budget Office (CBO) estimates that the
recession will reduce the surplus by $148 billion in 2002 by lowering tax revenues and
automatically increasing certain categories of outlays. The $148 billion reduction
does not include the cost of any policy changes or technical re-estimates.3

A pro-cyclical policy is one that exaggerates the effects of the business cycle.
For example, pro-cyclical monetary policy would raise interest rates in recessions,
dampening aggregate demand, and lower interest rates in expansions, adding to
aggregate demand. Tax cuts increase aggregate spending in the economy in the short
run. This may help return the economy to full potential if the economy is in recession,
but may increase inflationary pressures if the economy is already at full potential.
Instituting tax cuts during a downturn would be a counter-cyclical policy.4
Some trigger policies could be considered pro-cyclical because they would
prevent a tax reduction phase-in from occurring because poor economic growth
caused the surplus to shrink below the target, even if spending and tax policy had
been very restrained. Under these circumstances, it can be argued that the trigger
would exacerbate the downturn by restraining aggregate demand. Alternatively, if the
economy grew rapidly, the surplus could be above the target, regardless of spending
and tax behavior. If the growth of the economy were rapid enough to be inflationary,
allowing the phase-in would add to inflationary pressures.
Can a trigger policy be designed that avoids this problem? One option would be
to delegate to some body, for instance Congress or an executive department, possibly
the Commerce Department, the responsibility of evaluating each year whether
deteriorating economic conditions would make a trigger detrimental. If conditions
were found to be deteriorating, the phased-in reduction would be implemented
regardless of the whether the target had been met. This type of proposal could be
criticized on the grounds that it is based on a subjective decision, and thus could be
prey to the sort of political pressures that critics fear would undermine a trigger (see
below).
Is there a way to base the decision on a more objective standard? In principle,
it should be fairly easy. CBO calculates a “structural surplus,” or “full employment
surplus,” as well as the actual surplus. The structural surplus is based on the notion
that business cycle effects can be stripped out of tax revenues and outlays to reveal
how large the surplus would be if the economy, regardless of its current state, were
performing at its full potential. From this, CBO could extrapolate what other figures,
like the publicly held national debt and net interest payments, would be if the surplus
equaled the “structural surplus.” The trigger might be applied to the structural
surplus just in situations when the economy is below its full potential, so that phased-
in tax cuts are not forgone because of recession. Or it might also be applied to
3 CBO, Budget and Economic Outlook, January 2002.
4 For more information, see CRS Report RL30839, Income Tax Cuts, the Business Cycle,
and Economic Growth: A Macroeconomic Analysis, by Marc Labonte and Gail Makinen,.

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situations where the economy is above full employment, in which case the actual
surplus may be above the target, but taxes would still not be cut because the surplus
would have been larger if other tax and spending policies had been as restrained as
intended.5 Of course, the structural surplus is based on CBO’s assumptions
concerning the sustainable rates of economic growth and unemployment, which is
ultimately a subjective decision.
Many economists believe that monetary policy is a better tool than fiscal policy
for managing aggregate demand in the short run. If this is the case, they may argue,
implementing or preventing a tax cut on short run grounds is misguided, because
monetary policy can lead the economy to full employment regardless of the fiscal
stance. This argument could be applied in favor of a simpler trigger as well: even if
the trigger were pro-cyclical, it can be argued that monetary policy will adjust to
neutralize the trigger’s effect on aggregate demand anyway, making the argument a
moot point.
How Long Can the Trigger Effectively Last?
There is an asymmetry in timing between the phase-ins of EGTTRA and the
projected surpluses. 84% of the surpluses are forecast to occur from 2007-2011, and
all of the on-budget surpluses occur from 2010-2011, as seen in Table 1. (These
forecasts do not contain the revenue costs of any economic stimulus proposal, or any
other proposal that was not signed into law by January 2002.) By contrast, most of
the principal elements of EGTRRA, in terms of revenue effects, will be completely
phased in by 2006. This includes the reductions in marginal tax rates and the
reduction in the marriage penalty. Only the reduction in estate tax rates occurs
primarily after 2006, and the revenue effects of this provision will be largely outside
the 10 year budget window. Thus, it can be argued that the major uncertainty in
forecasts occurs after the trigger could effectively safeguard against uncertainty. In
other words, if the 2007-2011 surpluses fail to materialize, the trigger will do little to
offset the revenue loss.
5 Under the law, as was determined in the 1986 Supreme Court case Bowsher v. Synar,
automatic “triggered” changes in law must be based on estimates by the executive branch, in
this case through the Office for Management and Budget (OMB). This case declared the 1985
Balanced Budget and Emergency Deficit Control Act, or the original Gramm-Rudman-
Hollings Act, in part unconstitutional. While OMB does not calculate a structural surplus at
present, it could do so in the future by using the same methods that CBO uses.

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Table 1: Comparing the Baseline Projection with the
Administration Tax Cut
(Billions of Dollars)
2002-
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2011
CBO Baseline
-21
-14
54
103
128
166
202
250
294
439 1,602
Surplus
CBO Baseline On-
-181
-193
-141
-108
-99
-76
-56
-23
4
131 3,122
Budget Surplus
EGTRRA
-38
-91
-108
-107
-135
-152
-160
-168
-187
-130 -1,275
Source: CBO, Budget and Economic Outlook, January 2002.
Note: Revenue estimate of EGTRRA is based on the law expiring on December 31, 2010. Revenue
estimate of EGTRRA does not include larger debt service costs that result from the tax cut.
Might a Trigger Policy Fail for Political Reasons?
There are at least two arguments against triggers based on political, rather than
economic grounds. Some opponents of a trigger policy – and proponents of tax cuts
– argue that a trigger policy would have a perverse effect on public policy. They
argue that opponents of tax cuts might intentionally boost outlays during the
appropriations process enough that the surplus would miss its target and the phase-in
tax cuts would be prevented. In other words, they believe that a trigger may breed
more fiscal profligacy, rather than less.6 Some trigger proposals include targets on
the growth of discretionary spending as well to counter this possibility.
Other opponents argue that trigger policies would give a false sense of security,
but would ultimately be undermined by those who would use parliamentary tactics to
skirt the trigger. They point to the failure of the Gramm-Rudman-Hollings Act to
control the deficit as intended through triggered cuts in outlays in the late 1980s and
early 1990s. They argue that tough trigger targets would validate “cheating” to
contravene the trigger and lenient trigger targets would offer no meaningful fiscal
discipline. While Congress cannot simply ignore a trigger once it is law, there are
many ways it could be circumvented, depending on how the trigger is written. For
example, it might be circumvented by re-passing the tax cut or passing supplemental
appropriations after the trigger is applied. And future Congresses always retain the
right to pass a bill that would revoke the trigger outright. Proponents of triggers
argue that even if the Gramm-Rudman-Hollings Act did not work as well as intended,
it did create some fiscal restraint and the budget deficits would have been even larger
in its absence. As evidence, they point to the fact that discretionary spending fell from
10% of gross domestic product (GDP) in 1986 to 8.7% of GDP in 1990.
Some opponents of a trigger policy have argued that the surplus is better
safeguarded if the parts of the tax cut that have not yet been phase-ins are revoked
now. They argue that under current forecasts, any trigger targets are highly unlikely
to be met anyway, particularly if the target is on-budget balance. Thus, if future
provisions of the tax cut are already predicted to be unaffordable, lawmakers should
make certain they do not become law today, rather than take the chance that a trigger
6 For example, see Stephen Entin, “The Trouble With Triggers,” Congressional Advisory
#110, Institute for Research on the Economics of Taxation, February 13, 2001.

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will be subverted in the future. If the surplus proved larger than expected, then the
revoked provisions could be reinstated.
Uncertainty in Budget Projections
Since the trigger is likely to target today’s 10-year budget projection, one should
consider the uncertainty of such projections.7 For example, CBO projected in 1997
that the FY2000 budget would be in deficit by over $100 billion, even after adjusting
for policy changes since 1997. In fact, the FY2000 budget was in surplus by $236
billion. Even for the following fiscal year, budget projections are fairly inaccurate; as
the projection is extrapolated further into the future, it has historically been less and
less accurate. From 1981-1999, the average absolute value of the error in CBO’s
estimated surplus for the following budget year was 1.1% of GDP, after adjusting for
policy changes. This percentage of GDP equaled $109 billion in 2000. The average
error for 5 years in the future was 3.1% of GDP. Most of the inaccuracy came from
economic assumptions that turned out to be incorrect. Nor does the accuracy of
forecasts seem to be improving: policy changes explain only 43% of the $4 trillion
reduction in CBO’s 10-year baseline surplus since January 2001, the other $1.6 trillion
reduction in the baseline surplus is due to forecast re-estimation.
Thus, forecasts tend to become more inaccurate as one extrapolates further into
the future, which is troublesome considering that 84% of the on-budget surpluses are
forecast to occur from 2007-2011. This suggests that it would be desirable for a
trigger to leave a considerable amount of room for forecast error in outlier years. But
as the next section indicates, this uncertainty cannot easily be built into a trigger
policy. A trigger could gain considerable accuracy if targets for outlier years were re-
estimated as they are approached, but some would argue that this would defeat the
purpose of a trigger – to provide objective fiscal discipline in advance. If the trigger
were re-estimated as forecasts are updated, some believe that future manipulation of
the updated targets would allow unaffordable phase-ins to occur (or, conversely,
prevent affordable phase-ins from occurring).
Should a Trigger Target the Past, Present, or Future?
A trigger must target some budget outcome. But does it make more sense to
target past, present, or future outcomes? In other words, should the trigger be
applied to the previous fiscal year, after it has been observed? Should it apply to the
current fiscal year’s budget, after it has just been passed? Or should it apply to the
current fiscal year’s budget blueprint, at the beginning of the budget process? Each
choice has advantages and disadvantages.
Applying the trigger to the future would involve targeting the surplus generated
by the baseline projection for the coming year at the beginning of the budget process.
For example, in January 2004, the target for FY2005 phase-ins would be applied to
the FY2005 baseline. Notice that this is the only trigger target that is influenced
solely by changes in the economic and technical conditions underlying the baseline,
7 For more information, see CRS Report RL30854, Uncertainty in Budget Projections, by
Phillip Winters.

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whereas the other two targets are applied to a surplus influenced by both economic
changes and that year’s policy changes, and cannot easily distinguish between the two.
It can be argued that this type of target would place the trigger in the overall budget
context. This would make the tradeoffs between spending, tax cuts, and debt
reduction over the next 10 years most overt for the policymaker designing a trigger
today. The drawback, critics would argue, is that it would allow the target to be met
at the beginning of the budget process, allowing the phase-ins to be enacted, before
compromises and amendments had been made in the budget that might contravene the
target. It would also judge the target on budget forecasts that have historically
proven to be inaccurate. Furthermore, the temptation might exist to present an overly
optimistic baseline simply to meet the target.8
Targeting the “present” would involve applying the target to the budget balance
after that year’s budget had been passed (but before it had been implemented). For
example, the target for FY2005 phase-ins would be applied directly after the FY2005
budget was passed in September 2004. One advantage of this type of target is the
fact that the budget forecasts have historically become much more accurate by the end
of the budget resolution. But applying a trigger to the final budget resolution could
produce avoidance measures of a different type. A budget could be passed that met
the target, and then supplemental appropriations and emergency spending could be
undertaken after the phase-in was approved. It appears that many methods were
employed to avoid triggering the spending cuts mandated by the Gramm-Rudman-
Hollings Act when the deficits were increasing in the late 1980s and early 1990s.
Such activities, it can be argued, would be equally hard to prevent with a tax cut
trigger.
Targeting the “past” would involve targeting the past year’s actual result to
determine whether the next year’s phase-ins would occur. For example, in October
2004, the actual surplus for FY2004 would determine whether or not the FY2005
phase-in would occur. Applying the trigger to the past fiscal year’s results may be a
less intellectually coherent option, but the more practical way to avoid some of the
pitfalls outlined above. Some may argue that it does not seem particularly logical to
punish last year’s mistakes or excesses in this year’s budget, especially if this year’s
budget does not repeat those mistakes.9 On the other hand, proponents of this
approach might argue that “hindsight is 20-20,” and the only way to ensure that a
target is not contravened by purposely rosy forecasts or parliamentary maneuvers is
to give policymakers the chance to see how events played out in fact before applying
the trigger. It would also benefit from being applied to an actual result which is not,
therefore, subject to forecast uncertainty.
8 Tying a trigger to a structural surplus exacerbates this problem. The size of the full
employment surplus depends on what rate of economic growth is deemed consistent with full
employment. Thus, a target could be met by assuming whatever rate of economic growth
generates a full employment surplus equal to the target. However, there is little consensus
regarding what the “full employment” rate of growth is.
9 If the primary purpose of the trigger is to pay down the debt, then a trigger applied to the
past fiscal year may be seen as an effective response: if the debt is not paid down this year,
it accompanies us to the next year.

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Targeting the “past” is the only option whose rules do not prevent a deficit from
purposely occurring (assuming cheating did not occur in the other two options). This
is because the trigger is being applied to a different fiscal year than when the phase-ins
occur. For example, imagine that the 2005 phase-ins are being determined in
September 2004 by the 2004 actual on-budget surplus. Thus, nothing prevents an on-
budget deficit from occurring in 2004; the only result would be that the 2005 phase-in
would not occur. Alternatively, the target could be met in 2004, allowing the 2005
phase-in to occur. But this target would say nothing about the size of the 2005
surplus; thus, it would not prevent a 2005 phase-in from pushing the 2005 budget into
deficit.
Game theory analysis leads to the conclusion that the decision to have the trigger
apply to the past, present, or future becomes extremely important when considering
the uncertainty of budget projections.10 If the surpluses exceed the baseline
projection, the target is non-binding and irrelevant. Likewise, if the surpluses
disappear or turn out to be so small that the tax cut is deemed unaffordable, then any
type of target will prevent the phase-ins from proceeding. But imagine that the
surplus projections turn out to be smaller than expected but still large enough for a
tax cut. For example, the tax cut is estimated to cost about $2 trillion when extra
interest costs are included, and the on-budget surplus is forecast to equal about $3
trillion over 10 years. Assume that policymakers would like to spend $2 trillion on
a tax cut and $1 trillion on other policy priorities which have not yet been enacted.
If the surplus turns out to total only $2 trillion, either the tax cut or the other policy
initiatives could be enacted, but not both, if the budget is to remain in surplus. Any
trigger that is based on actual results would not build in these types of distinctions to
account for forecast uncertainty. Hence, how the trigger is designed would determine
whether the tax cut or the other policy priorities would be given priority in this case.
By its nature, the trigger that targets the “past” result will automatically ensure
that the tax cut would take priority over other policy initiatives in the coming fiscal
year. By targeting the last year’s results, the phase-in, in effect, becomes the first
policy decision of the new budget. This type of trigger, based on an outcome that
occurs after policy changes, cannot easily differentiate between changes in the surplus
due to changes in economic conditions and changes due to policy. Thus, the trigger
cannot be designed to accommodate those policymakers who would choose to give
less priority to the tax cut than other policy initiatives if the surplus shrank for
economic reasons. Perversely, with this type of trigger, once Congress discovers that
next year’s baseline surplus has been projected to fall for economic reasons, next
year’s phase-in could be prevented from occurring only by purposely increasing
spending enough this year to miss the target.
A trigger applied to the present would have a very different effect. This type of
trigger, occurring at the end of the budget process, would also be unable to
distinguish between changes in the surplus being driven by economic changes rather
than policy changes. But unlike the trigger applied to the past, this trigger would be
the last policy decision of the budget. Thus, the designer of a trigger policy cannot
design the target in a way that gives priority in advance to tax cuts rather than other
10 The following analysis assumes that targets would not be updated as forecasts are updated.

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policy initiatives, or vice versa, in the light of forecast uncertainty. Instead, the ability
to choose priorities would fall to the Congress passing the budget in question. Once
Congress learns that the baseline surplus has shrunk for economic reasons, it would
have to decide whether to set aside the remaining surplus for tax cuts, by meeting the
target, or other policy initiatives, by missing the target. In many respects, a trigger
that targets the present is equivalent to passing each year’s phase-ins as a separate law
each year.
A trigger applied to the “future” is the only type of trigger that can be designed
to distinguish between economic changes and policy changes that affect the surplus.
That is because it is applied to the baseline surplus, before policy changes occur.
Thus, it follows that only a trigger applied to the future can be designed to favor
either tax cuts or other policy initiatives in the event that surplus falls for economic
reasons. A policymaker who wished to give priority to the tax cut would target a
baseline surplus equal in size to only the cost of the tax cut. A policymaker who
wished to give priority to other policy initiatives would target a baseline surplus equal
to the entire baseline surplus.
It also follows from this analysis that once another policy initiative becomes law,
it generally would have priority over the tax cut phase-ins regardless of what type of
trigger were used – at that point, it, unlike the phase-ins, would not be automatically
revoked if the surplus forecast falls.
Would a Trigger Create Uncertainty in Decision Making?
Those who believe that people’s incentives are highly influenced by marginal tax
rates may oppose a trigger mechanism on the grounds that it would create uncertainty
in individuals’ planning and decision making regarding work, saving, and
consumption. In their opinion, this would defeat one of the primary goals of tax
reduction – increasing economic growth through greater incentives to work and save.
For example, individuals might be hampered in their investment planning because they
would be unable to predict whether or not a tax cut phase in will occur. This
argument seems more persuasive in the case of corporate taxes since businesses do
formally model their capital outlay plans several years in advance. But opponents find
this argument unpersuasive when applied to individuals because they believe that most
individuals’ future plans are vague and subject to change.
What Number Should Be Targeted?
When deciding how to determine what number to target for a trigger, there are
a few points to keep in mind:
! Budget projections are nominal figures, based on an assumed inflation rate. For
most numbers, it may be more consistent to adjust the target for inflation.
Otherwise, the target may be missed in nominal terms, for better or for worse,
because the actual inflation rate was different than forecast, even though the
target was met when measured by real purchasing power. Revenues tend to

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grow more rapidly than outlays when inflation rises.11 An exception to this
would be a target for the national debt if the trigger’s goal were to effectively
retire the debt. Ignoring the effect of inflation on the surpluses, the national
debt will be the same in nominal terms regardless of how high or low inflation
proves to be in the future.
! The budget surpluses, especially the on-budget portion, are projected to grow
considerably each year of the 10-year forecast. If a trigger were meant to
prevent “fiscal profligacy,” a target that stays at a constant surplus (or interest
payment) level could allow for more “profligacy” each year. In this case,
targeting a percentage of the forecast might be considered.
! If the target were based on the baseline estimate, the target would need to take
into consideration the fact that some baseline assumptions are legalistic, rather
than realistic.12 The target would more likely be met if baseline assumptions
were modified when appropriate.
! If the trigger were applied to the surplus on a certain date each year, the
targeted amount would need to account for the fact that tax revenues are
highly seasonal because many taxes are paid quarterly or yearly. This makes
the publicly held debt highly seasonal as well. Likewise, day-to-day funding
requirements of the Treasury lead to an imprecise relationship between the size
of the surplus and the reduction in the publicly held debt. Since the seasonality
is predictable in both cases, estimating the debt at any given time of the year
is fairly simple, but important to acknowledge. It would be inappropriate for
a trigger based on, say, April’s data to be applied to May’s data. Triggers that
were based on a comparison to the same point in the previous fiscal year would
avoid this problem.
! Presumably, any phase-in would occur (or not occur) in January, at the
beginning of the new tax year. The mismatch between the budget fiscal year,
which begins in October, and the tax calendar year, which begins in January,
may be corrected by an adjustment in the target used for the trigger. Since a
phased-in rate reduction would occur in January, the revenues of each fiscal
year where a phase in had occurred would be generated from one quarter of
revenues at the last tax year’s higher rate and three quarters of revenue at the
next tax year’s lower rate. This gives an inflated impression of what revenues
are being generated by current tax policy. This problem could be avoided by
targeting the surplus generated during only the last three quarters of the fiscal
year.
! A debt target, rather than a surplus target, may not prevent the on-budget
portion of the budget from returning to deficit. In accounting terms, this is
because the debt is a cumulative “stock,” determined by the sum of past
11 CBO, Budget and Economic Outlook, January 2001, page 115.
12 CBO elaborates on this concept on p. 7 of The Budget and Economic Outlook, January
2001. For a discussion of alternative baseline assumptions, see CRS Report RL30901,
Projecting the Surplus: A Discussion of Issues, by Marc Labonte and Philip Winters.

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deficits, while the surplus is a yearly “flow,” determined by each year’s budget
balance. For example, imagine that the surplus were larger than expected in
2002 so that debt reduction greatly exceeded the debt target. If the reduction
that occurred in 2002 were large enough, it would imply that the debt target
could be met in 2003 even with an on-budget deficit.