If you raise taxes in 1997, you're going to stifle both bad investments like Pets.com and good investments like broadband infrastructure. You also have to choose between reducing the national debt and spending. In hindsight, maybe we should have used the government surplus to build infrastructure or improve our healthcare system.
Reducing the national debt too much is another thing to worry about. Our financial system requires a good number of treasury bonds. Tons of players in the financial system need to have that specific kind of asset on their books.
Also, just as a matter of theory: If a government project will create a net tax revenue increase in the future through new economic activity, above the cost of borrowing, why not deficit spend on that project even in good times?
I strongly agree with your spending-over-debt-repayment argument, though I think it is erroneous to assume that 'good' investments will be stifled by increasing taxes. The motivations for investment are enormously greater during those 'good times', so that only truly confiscatory taxes would thwart them - just as even zero taxation will do nothing to motivate investment during times of slack/falling demand and deflation.
