Beasts and Burdens

by Ramesh Ponnuru

Just thinking out loud here.

Let’s suppose that we get a grand bargain in 2013 that increases federal revenue and decreases federal spending as a share of the economy. Enactment of this law would seem to strengthen the case for the Niskanen thesis: Taxes would be going up and spending down at the same time. But. . . 

Let’s further suppose that it was always inevitable that some time around 2013 there would have to be some reckoning in which projected future revenues and spending were brought into rough alignment. Doesn’t it seem likely that we would end up with a lower final level of taxes (and thus spending) than we would have if Bush had never cut taxes?

To put it another way: Let’s say we still had the Clinton-era tax rates and a (smaller but still quite large) long-term debt problem. Wouldn’t we be debating an increase in tax rates to a higher level than we are now? That seems to me pretty likely. The baseline from which we’re negotiating would be higher, perceptions of what’s tolerable would be higher, expectations of tax rates would be higher. On the Niskanen theory there would be a countervailing effect: In the interim the tax cuts caused spending to be higher and thus moved the spending baseline higher. But Niskanen didn’t find that a dollar of tax cuts were associated with a dollar of spending increases; he found that a 1 percent reduction in revenue over GDP was associated with a 0.15 percent increase in spending over GDP. So the countervailing effect would be smaller.

If these suppositions are right, then the Bush tax cuts would turn out to have lowered federal spending in the long run. They would end up having been moves in a long-term process of bargaining.

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