VOLUME SIXTEEN, NUMBER ONE

responsibility for influencing nor the capability to influence the performance of the national economy through budget policy; and (3) despite such requirements, the state-local sector has grown faster than the federal sector since World War II, and some state and local governments have recently encountered substantial fiscal difficulties.

Article 5 of the Constitution stipulates that amendments can be initiated in one of two ways: by a twothirds vote in both houses of Congress or by a constitutional convention called by Congress on application of the legislatures of two-thirds (thirty-four) of the states. In either case, a ratification of proposed amendments requires votes by three-quarters (thirty-eight) of the states. In fact, all the existing amendments were proposed by the Congress rather than through a constitutional convention. No definitive precedents exist, therefore, for the terms of reference of such a convention. In the circumstances, there is considerable debate about the wisdom of calling a convention whose delegates might seek to revise other elements of the Constitution as well. If Congress were to propose an amendment, the ambiguities and risks of a constitutional convention would not arise. And in fact many such proposals have been introduced. Typical of the ones calling for a balanced budget was Senate Joint Resolution 38, introduced by Senator Harry F. Byrd of Virginia. That resolution said that "the Congress shall assure that total outlays of the Government during any fiscal year do not exceed the total receipts of the Government during such fiscal year," with an escape clause activated by a two-thirds vote in both houses in the case of a national emergency. The simplicity of the language masks innumerable complexities and uncertainties that would be encountered in implementation. These complexities arise because of (1) the length of time between budget preparation and completion of the fiscal year, (2) the sensitivity of receipts and expenditures to changes in the performance of the economy, and (3) the joint responsibility of the executive and legislative branches for budgetary decisions.

Presumably, the President would have to propose a balanced budget in his budget message in January for the fiscal year ending twenty-one months later, unless he decided to ask Congress to declare a national emergency. The economic assumptions underlying his budget estimates would be critical, since a one percentage point difference in real GNP can translate into an $8 billion change in the budget surplus or deficit. It is true that the President faces the same forecasting difficulties today in making up the budget. But when the forecasts go awry, as they almost inevitably have done (see table 1), at least the President is not in jeopardy of violating the Constitution.

showed a deficit because of changes in the economy, despite the earlier plan to balance the budget?' Senator Byrd's resolution says simply that "the Congress shall have power to enforce this article by appropriate legislation."

Aside from questions of mechanics and enforcement, one should ponder what new incentives would be set up by such an amendment. Would the amendment really instill the fiscal discipline intended by its sponsors, or would it lead to new and unimagined ingenuity in redefining the budget and restructuring modes of expenditures to comply with the mandate?

The federal budget is a living document. To provide a more comprehensive accounting of the impact of federal transactions on the economy, the unified budget adopted in 1969 combined the earlier administrative budget with the operations of the important trust funds."

1. One possibility might be to instruct the secretary of the treasury to stop issuing checks whenever the receipts fell short of expenditures during a fiscal year, an action that would grind the government to a halt, particularly when receipts were at a seasonal low. Probably for this reason, the typical proposal requires a balance between receipts and expenditures for an entire fiscal year.

2. In the aggregate, these trust funds are currently accruing annual surpluses. Under a balanced budget amendment, supporters of trust fund-financed programs (for example, social security and highways) would almost surely try to have the trust funds removed from the budget to protect spending for these programs, thus reversing the 1969 advance in budgetary accounting.

But there have been many shifts in the other direction. Federally sponsored lending institutions, such as the Federal National Mortgage Association and the Federal Intermediate Credit Banks (for agriculture), were "privatized" to remove them from the budget. Subsequently, Congress created the Federal Home Loan Mortgage Corporation and the Student Loan Marketing Association outside the budget. The Export-Import Bank was removed from the budget in 1971, only to be reinstated in 1976. In total, outlays of off-budget federal entities are expected to amount to $12 billion in fiscal 1980 and those of government-sponsored agencies to $19.1 billion. The total of $31.1 billion is 6 percent of the $531.6 billion proposed by the President for 1980 (table 2). Loan guar

antees are another important means of allocating resources that escape current budget accounting. Guaranteed and insured loans outstanding are projected to be almost $284 billion in 1980.

The room for maneuver is by no means limited to moving specific agencies or programs into and out of the budget totals. There are any number of ways in which Congress can structure programs to serve similar public purposes but to have very different impacts on the budget. Instead of direct expenditures on behalf of, say, housing or agriculture, Congress can create subsidized loan programs, or loan guarantees, or special tax credits and deductions, or crop support prices and acreage allotments. In the environmental, health, and safety areas, Congress has required that companies in the private sector spend funds to assure compliance with the relevant standards, funds that otherwise might have shown up as budget outlays. Federal agencies could be instructed to

THE BROOKINGS BULLETIN

defer payment of bills for extended periods, thereby creating a kind of under-the-table authority to run a deficit. Senator Gary W. Hart of Colorado recently renewed an old suggestion that would separate current expenses from long-term capital investments in the budget, supposedly to bring it into closer conformity with practices followed by state and local governments and by business. With a capital budget option, a strictly limited current budget would create incentives to define many current outlays as capital outlays (for example, grants to students might be so defined because they build human capital), and to provide more federal stimulus through bricks, mortar, and steel rather than make a careful assessment of alternatives (for example, public housing would be favored over rent subsidies and more buses over fare subsidies).

The tougher the constraints on spending budget dollars, the greater the incentive for finding off-budget means of accomplishing public purposes. Such pressures exist today. They could become irresistible if the alternative were violation of the Constitution. The ultimate irony would be that these off-budget devices would increase costs and promote inefficiency.

Federal Spending Amendment

A different sort of proposed constitutional amendment would not prohibit deficits but would limit federal spending "to protect the people against excessive governmental burdens and to promote sound fiscal and monetary policies." More specifically, the amended Constitution would read in part:

Total outlays in any fiscal year shall not increase by a percentage greater than the percentage increase in nominal gross national product in the last calendar year ending prior to the beginning of said fiscal year....

If inflation for the last calendar year ending prior to the beginning of any fiscal year is more than three percent, the permissible percentage increase in total outlays for that fiscal year shall be reduced by one-fourth of the excess of inflation over three percent....

This article may be enforced by one or more members of the Congress in an action brought in the United States District Court for the District of Columbia.... The action shall name as defendant the Treasurer of the United States, who shall have authority over outlays by any unit or agency of the Government of the United States when required by a court order.

This proposal is the work of the National Tax Limitation Committee, of which Milton Friedman is a prominent member. Among other things, it covers both budget and off-budget outlays, incorporates an escape clause for national emergencies, and provides some protection for grants to state and local governments. This more elaborate drafting spells out more details but carries its own costs. As Senator Edmund S. Muskie of Maine said, "Our Constitution does only two things. It blueprints

VOLUME SIXTEEN, NUMBER ONE

the structures by which we govern ourselves. And it defines the human rights we respect. Do we really want to devalue that currency with algebra and bar graphs?"""

Apart from constitutional aesthetics, the spending limitation amendment raises many of the same practical difficulties in implementation that the balanced budget amendment does. Especially attractive would be the conversion of existing spending programs into tax credits, thereby removing them from the outlay limit and from annual congressional budget review. Since certain categories of expenditures (for example, unemployment insurance) rise automatically during recessions, expenditure reductions presumably would have to made in other, noncyclical categories, with uncertain programmatic consequences. More fundamentally, in a changing society the Constitution should not specify a static relationship between the size of the federal government sector (with the inherent problems in determining which off-budget accounts to include) and the economy as measured by GNP.

Despite these questions, an amendment limiting outlays would have fewer capricious and adverse effects on the performance of the national economy than the proposal for perpetually balanced budgets. In particular, it would not necessarily require the federal government to cut total expenditures during cyclical downturns, a step that could only intensify a recession. It would also allow the use of tax policy as a tool for countercyclical adjust

ment.

Alternative Approaches

A number of suggestions for greater fiscal restraint involve taking less drastic steps. Senator William Proxmire and others, for example, have proposed a bill (S.331)— not an amendment-that would require a balanced budget whenever real economic growth was at or above 3 percent, an approximation of the long-term growth potential of the economy. Although this bill suffers from many of the measurement, incentive, and enforcement difficulties mentioned in connection with the balanced budget amendment, it does allow deficits in periods of economic slack. And as a law rather than a constitutional amendment, it could be changed with less delay if found to be unworkable or perverse in its effects.

A more modest but nevertheless important suggestion, designed to meet taxpayer concerns, has been put forward by Robert W. Hartman of the Brookings Institution.' He would build on the improvements already in

3. Most economists also would object to the introduction into the Constitution of such technical terms as gross national product, lest there be pressure to redefine these terms to meet constitutional requirements.

4. Robert W. Hartman, "Kemp-Roth and All That," Taxing and Spending, vol. 2 (February 1979), pp. 12-18.

5

troduced in the congressional budget process by the Congressional Budget and Impoundment Control Act of 1974. That act for the first time required-through the newly created budget committees in both houses-a comprehensive review of expenditures and revenues, and concurrent binding resolutions on the following year's budget.

Hartman's suggestion, which parallels similar proposals by the Congressional Budget Office, is that the concurrent resolutions include spending and taxing limits for the two years following the budget year, as well as for the budget year itself. This kind of budget blueprint would (1) focus debate on longer-term trends in the budget and their implications for the tradeoff between public and private needs (rather than on countercyclical fiscal policy, as is now the case), (2) require congressional committees to face up to the out-year tradeoffs between federal programs and predetermined expenditure targets, (3) highlight rising expenditures before they became "uncontrollable," and (4) reduce the incentive for tax committees to load the effect of tax cuts into years beyond the concurrent resolution.

The congressional budget process has already gener ated tension among members and committees as its constraints have taken hold. Out-year limits would add new pressures. However, it is much more appropriate to nudge Congress toward greater fiscal responsibility in this orderly way than to create a straitjacket that renders fiscal policy impotent as an economic policy tool or encourages subterfuge that would make a mockery of a constitutional amendment.

Integrating

the Income Taxes

Integration of the corporate and individual income taxes is an idea that has gained prominence since the midseventies. It was twice raised by the Ford administration, heralded as the centerpiece of the Carter administration's 1978 tax reform package, and proposed by the chairman of the House Ways and Means Committee in 1978. Yet to most Americans, the idea is so novel that they would have difficulty answering questions such as. What is tax integration? What are its advantages and disadvantages? Why the recent interest? Not to mention: How is integration achieved? What issues of tax policy are involved? Would it create unusual practical problems?

To explore these and a host of related questions. Brookings commissioned Charles E. McLure, Jr., vice

6

president of the National Bureau of Economic Research, to make a comprehensive study emphasizing the practical aspects of integration, were it to be attempted in the United States. McLure's work was the topic of a conference of experts held at Brookings in late 1977. Together with a summary of the conference discussion, Brookings has published his study as a book, Must Corporate Income Be Taxed Twice?

The question in the title refers to the American practice of taxing the earnings of corporations once as corporate income and again, after distribution to shareholders, as personal income. Integration of the personal and corporate income taxes would end or at least reduce the double taxation, with beneficial results for corporate financial policy, capital formation, income distribution,

THE BROOKINGS BULLETIN

currency transactions, for instance-would keep its identity in the hands of the shareholder and be taxed to him as such. The data processing problems would be formidable.

Such complexities are the tip of a larger iceberg. McLure makes detailed analyses of the technical issues raised by tax preferences-exclusions, deductions, credits, and the like-and by the need to accommodate international capital flows, foreign dividend payments, and differences among national tax codes. The latter issues weigh heavily in any serious discussion of integration, given the importance of multinational corporations to the U.S. and world economies.

Though it seems to McLure that full integration would be hard to implement, he contends that a definitive judgment on feasibility should await further analysis. "For this reason, if no other," he says, "full integration is not something that should be or could be-rushed into. But by the same token, it should not be simply dismissed as an academician's pipe dream."

The problems would be fewer and more manageable if the United States were to confine itself to some form of dividend relief-perhaps by the imputation system, in which all or part of a corporation's tax liability on distributed earnings is "imputed" to the shareholders and treated as withholding against their personal income tax on dividends. Other nations have used similar systems for many years and for various reasons-France and West Germany to increase interest in their domestic stock markets, and Canada to stimulate domestic capital formation.

In a chapter on foreign experience, McLure examines the mechanisms of dividend relief used in those countries and in the United Kingdom. Although their tax policies reflect economic and legal environments different from ours, their experience is instructive, not least because it shows the difficulty of reducing the double taxation of international capital flows. Indeed, says McLure, Americans should pay more attention to international issues as the debate on tax integration moves beyond questions of tax policy to problems of imple

mentation.

Discussion at the Brookings conference was limited to the technical questions arising from a move to full integration or to dividend relief, leaving aside the desirability of such a move. The participants gave full integration a mixed appraisal, noting that even if its complexities could be overcome, it would not simplify the tax code. While dividend relief was considered to be more manageable, foreign experience did not suggest that it could provide an easy route to full integration "through the back door."

So the answer to the original question is no: corporate income need not be taxed twice. But before some form of