The Corner

Tax Cuts & Revenues

It seems to me that conservatives are going to have to respond to Jonathan Rauch’s argument in the new Atlantic. I haven’t read it yet, but Sebastian Mallaby summarizes it here:

It’s been a long time since honest believers argued that tax cuts pay for themselves. When you have extremely high rates of taxation — say, 70 percent-plus — there may be something to this claim: When rates are that high, the rich go to extraordinary lengths to evade taxes and aren’t motivated to earn more, so it’s not crazy to argue that tax cuts might boost tax receipts. But you have to go back to the 1970s to find tax rates that high. When the top income tax bracket is in the 30 to 40 percent range, nobody serious believes that tax cuts change behavior enough to pay for themselves.

Instead, tax cutters have clung to a separate faith: that tax cuts will force matching cuts in spending by the government. It’s a faith that Rauch traces to the presidential debates of 1980. “John tells us that first we’ve got to reduce spending before we can reduce taxes,” Ronald Reagan declared in reply to the independent candidate, John Anderson. “Well, if you’ve got a kid that’s extravagant, you can lecture him all you want to about his extravagance. Or you can cut his allowance and achieve the same end much quicker.”

Ever since that debate, the “starve the beast” argument has been a favorite of Republicans. It’s an expedient argument, of course, since it justifies the tax cuts that voters are assumed to love. But even the most nakedly cynical politicians need policy fig leaves. “Starve the beast” has allowed tax cutters to feel decent.

Or at least half decent. Everybody knows that the Reagan tax cuts did not actually cause spending to come down in the 1980s; most people have surely noticed that the Bush I and Clinton tax hikes were followed by spending constraint in the 1990s; and the Bush II tax cuts certainly have not stopped Congress from spending like a drunken sailor recently. But then the plural of anecdote is not data, and until the starve-the-beast theory is conclusively discredited, tax cutters won’t stop hiding behind it.

Well, now it has been discredited. Rauch cites William Niskanen, an economist who worked in the Reagan White House and now chairs the Cato Institute. Niskanen has crunched the numbers between 1981 and 2005, testing for a relationship between tax cuts and government spending, and controlling for levels of unemployment, since these affect spending and taxes independently. Niskanen’s result punctures his own party’s dogma. Tax cuts are associated with increases in government spending. The best strategy for forcing cuts in government is actually to raise taxes.

Me: One point which seems worth raising is that the key to this argument is that saying tax cuts don’t pay for themselves is different than saying tax cuts don’t result in increased revenue. This, it seems to me, is central to most conservative arguments for cutting taxes. The growth in spending Niskanen (an objectively credible voice, I should add) identifies is probably attributable to several factors — some of them noted by Mallaby — but one of them may be an increase in revenues.

Anyway, I need to read the Rauch piece and there are others better qualified to deal with the economic issues. But if tax increases can be demonstrated to shrink government in some significant way, I’m certainly open to them. But there are way to many ifs and buts built into that hypothetical to deal with here and now.

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