Politics & Policy

A Budget Primer

Let us attempt to focus conceptually on the whole business of the budget deficit without using any numbers. Ready?

The welfare business in America is engaged in two enterprises. The first is insurance. The second, redistribution.

The voters have said, over the years, that they desire more and more things without a price tag. The principal form of welfare is also the earliest. It is, of course, education. Everyone in the United States can receive at least 12 years of free education. More than one hundred years after that form of insurance was given, the American people voted to insure themselves against indigence in old age, whence Social Security. In due course farmers voted to insure themselves against low prices, and therefore the concept of parity arose. Then the people asked to be protected against unemployment, at least for a few months, so unemployment insurance was born. They then asked to insure themselves against medical expenses of various kinds, which gave rise to Medicare and Medicaid.

But of course, someone has to pay the schoolteacher, and the farmer, and the doctors and nurses, and the administrators of these programs, so that taxes of various kinds were levied. In due course the people found themselves paying income taxes, inheritance taxes, and excise taxes in return for all those services. But there arose a greater and greater disparity between the cost of insurance and the taxes paid to provide that insurance. Something called a deficit was born. This deficit business could not have happened if the cost of the insurance had been directly related to the cost of the benefits. That is the way private insurance companies work, not governments. The difference here between the two is that insurance companies are engaged exclusively in insurance, with every client paying his own way. Whereas government, as noted, is engaged simultaneously in insurance and in redistribution. Those who cannot pay premiums don’t have to. They simply add the cost of their benefits to the cost of others’.

Anyway, the deficit grew and grew and grew, so much so that the people were told that it threatened the stability of the price system. Along came a Republican President who said the tax structure was causing positive damage. That the people who were taking out all that social insurance were on the one hand not paying the cost of the insurance; and, on the other hand, were being taxed so heavily as to jeopardize their productivity. So he proposed to cut down taxes, and to cut down insurance. Congress agreed to cut down taxes, but not to cut down insurance, so that the deficit deepened.

Plotting the economic future requires that you do not do permanent damage to the capital machine.

Meanwhile, the Republican President said that we had neglected the first responsibility of government, namely defense. He said, in effect, that that too was a form of insurance: because just as we want to insure against indigent old age, so we want to insure against the loss of our liberties. The Democratic opposition went along, but rather sulkily, and it proposed higher taxation to pay for our defense insurance.

In proposing higher taxation, the Democrats kept talking about taxing the rich. But they were quite vague about it, because it’s one thing to talk about taxing the rich, another thing entirely to tax them sufficiently to make up the deficit. The money simply isn’t there. If you increased the tax of those already paying half of their incremental dollar to the government by 50 per cent, you would not make a serious dent in the deficit.

Meaning what, in the long run? That the people are going to have to decide to tax themselves more, or else to do with less insurance. The trouble with increased taxation is that it hardens the productive arteries, and you find a whole class of people designing their economic lives not around the production of goods and services but around the reduction of tax exposure.

And there has to come that finite point when there isn’t any surplus there to take care of the insurance. If there were, then India and Africa and Latin America could have, for instance, high social security retirement benefits. So that plotting the economic future requires that you do not do permanent damage to the capital machine.

— William F. Buckley Jr. was the founder and editor of National Review.


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