Politics & Policy

Tax Cuts = More Spending?

If this is so, what does it mean for supporters of tax cuts?

I want the government both to spend less money and cut taxes. But if in cutting taxes the government is prompted to spend more money, should I still be in favor of tax cuts?

 

#ad#I ask this question in response to recent opinions taken by a few influential writers, including Jonathan Chait, Sebastian Mallaby, and Jonathan Rauch. Each has pointed to research that claims cutting taxes leads to increased spending. One implication of the research, they aver, is that if conservatives and libertarians are truly interested in cutting spending, they should reconsider their support for tax cuts.

 

But these writers pay insufficient attention to another implication of the research they cite: Americans don’t want all the government that is thrust upon them. I’ll get to that in a moment, but first let’s look at the claim that tax cuts prompt spending increases.

 

Many anti-tax advocates have argued that tax cuts are necessary to take away the government’s ability to spend. The idea is that tax cuts will yield deficits, which will prompt voters to want to cut back on spending. This is the “starve the beast” school of tax-cut enthusiasm.

 

But research from the Cato Institute’s William Niskanen suggests that cutting taxes is not starving the beast. According to Rauch,

Niskanen recently analyzed data from 1981 to 2005 and found “no sign that deficits have ever acted as a constraint on spending.”

Rauch continues,

looking at 1981 to 2005, Niskanen … asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow. Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002 (17.8 percent last year). Perhaps not surprisingly, government spending has risen under Bush. 

“The implications of [Niskanen’s] findings are discomfiting, and in a sense tragic,” for conservatives, Rauch says. Mallaby says of Niskanen’s research, “for honest believers in tax cuts, it’s devastating.” Chait is particularly gleeful, making fun of “anti-tax nuts” in the Republican party.

 

Let’s just stipulate for a moment that the reports from Chait, Rauch, and Mallaby are correct in their broad brushstrokes. The first thing we need to figure out is why this is so: Why would tax cuts prompt more spending? The only explanation so far comes from Niskanen himself. According to Rauch,

Niskanen was suspicious of Starve the Beast. He thought it more likely that tax cuts, when unmatched with spending cuts, would reduce the apparent cost of government, thus stimulating rather than stunting Washington’s growth. “You make government look cheaper than it would otherwise be,” he said recently.

If this is the reason for the correlation between tax cuts and spending increases, the implications are indeed very ominous — not for conservatives, but for progressives and other advocates of large, activist government. Simply put, Americans view government spending as no bargain.

 

This is remarkable given just how progressive the tax code is. To give just one helpful metric of its progressivity, the Tax Foundation estimates that this year, “91 million individuals will face a zero or negative tax liability …  Adding to this figure the 15 million households and individuals who file no tax return at all, roughly 121 million Americans — or 41 percent of the U.S. population — will be completely outside the federal income tax system.” Despite the tax burden being so slight for so many — over 40 percent! — Americans do not want more than 19 percent of GDP devoted to taxes.  

 

Let’s consider what this finding means for the “party of government” over the next 20 to 40 years. Given the demographic shifts we are facing — many more old people, all living much longer — and the explosive growth in entitlement spending this will prompt, Niskanen’s findings are in fact terrible news for liberals (and “compassionate” conservatives, too).

 

Economists Jagadeesh Gokhale and Kent Smetters recently updated their assessment of the government’s fiscal imbalances — how much more the government will be spending than what it will take in. Bush and the Republicans in Congress have had their share of spending abuses, it’s true. But forthcoming U.S. auto-pilot entitlement spending makes Bush & Co. look like pikers.

 

These economists discovered that “the nation’s fiscal imbalance has grown from around $44 trillion dollars as of fiscal year end 2002 to about $63 trillion. The imbalance also grows by more than $1.5 trillion (in inflation adjusted terms) each year that action is not taken to reduce it.”

 

What would it take to correct this? Gokhale and Smetters say that,

Achieving fiscal balance would require either massive tax increases … or massive cuts in government outlays, for example, a 77.8% immediate and permanent reduction in all non-Social Security and non-Medicare outlays.

There you have it. The only solution to our entitlement problem is to massively increase taxes — which Niskanen’s research suggests Americans do not have much stomach for — or radically restructure and slash spending. This puts the party of government — liberals and most Democrats — in an extremely uncomfortable political position for the next generation.

 

What Rauch, Mallaby, and Chait forgot to tell you about the Niskanen research (I’m confident Rauch looked at the research, but I’m not sure if Mallaby and Chait did) is the finding that “our political system is biased in favor of larger government spending than a majority of the voters prefer.” Remember, the problem is that taxpayers love spending when they don’t feel as if they are paying for it thanks to tax cuts. One solution is to tie government expenditures more closely to taxes. Niskanen proposes an intriguing idea in his analysis, calling for “a constitutional amendment that total federal spending in any fiscal year may not exceed 110 percent of total federal receipts in the second prior fiscal year.” Now that sounds like a fine idea.

 

How about it, fellas?

 

– Nick Schulz is editor of TCSDaily.com.

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