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Do Tax Cuts Grow Government?

By W. James Antle III

Here’s one for your counterintuitive thoughts file: Do the Bush tax cuts promote big government? In an op-ed piece published in the New York Times on September 21, NYU law professor and author Daniel Shaviro advances this novel argument. Far from starving the beast, today’s tax cuts will lead to a greater government impact on the economy down the road.

Before dismissing Shaviro out of hand, let us first contemplate some of his valid observations. The total difference between the benefits we are offering to pay future retirees via such entitlements as Social Security and Medicare and the projected revenues available to pay for them is a staggering $70 trillion. Despite his sober reform rhetoric, President Bush has actually added to this immense burden with his unwise prescription drug benefit. It is correct to describe this as, in Shaviro’s words, “a straight tax increase on future generations.”

It is also correct to point out that chronic deficit spending will have to be paid for. The money we borrow to cover our annual federal budget deficits in excess of $400 billion will someday be paid back. Future taxpayers will have to pay off the bonds that are being used to finance current federal expenditures. Beyond any actual economic impact that deficits have, when they reach the levels seen today they also tend to create the political conditions necessary for tax increases in the future.

The idea that all tax cuts necessarily pay for themselves is false and not even supported by the actual economic assumptions that underlie supply-side theory. Nor should tax cuts be continually accompanied by ever-rising federal spending. A borrow-and-spend fiscal policy approach is ultimately no more fiscally responsible than that traditional liberal nostrum of tax-and-spend. A tax cut conceived under such an approach is rightly described by economist Alex Tabarrok as more of a “tax shift.” And while John Kerry certainly would swell the welfare state, Bush’s record on spending is difficult to reconcile with his newfound stump-speech zeal for smaller, more efficient government.

So are the Bush tax cuts really a “tax shift” that will serve only to feed the beast known as the federal leviathan rather than starve it? Only if you ignore the real root problem, which is as always the level of federal spending. Repealing the Bush tax cuts but leaving spending at its present level would by no means shrink government.

In fact, these tax cuts are likely to improve the long-term growth trend of the economy, just as we’ve seen the highest growth rates in 20 years as the rates have come down. At the very least, this means that the revenue impact will be far less than static projections suggest. When the marginal tax rates dropped from highs of 90 percent in the 1960s and 70 percent immediately preceding the Reagan era, we did not experience long-term annual federal revenue reductions as a result. If accompanied by responsible spending, there is no need for the Bush tax cuts to result in anything approaching a long-term increase in public debt.

While we should rightly be skeptical of political arguments about “starving the beast,” lower taxes are an essential part of any retrenchment of government. The real redistribution of income they produce is from the public sector to the people who actually earned the income in the private sector.

As much as we must disavow the delusion of “big government conservatism” and its attendant folly of coupling tax cuts with spending increases, future generations of taxpayers are not imperiled by the prospect of top marginal tax rates dipping below 40 percent. The danger lies in an economically irrational redistributive state that promises benefits no free and prosperous society can afford to pay based on its changing demographics.

Shaviro warns that tax cuts make it more likely that we will have to contemplate tax increases or benefit cuts in the future. But this is incoherent; these scenarios can only exist if we maintain unrealistic federal spending commitments. These impending imbalances loomed before the Bush tax cuts and Shaviro does not provide any economically credible evidence that these modest reductions in marginal tax rates have made the problem worse.

The choice between bigger or smaller government must ultimately be made, as always, on the spending side of the equation. The problem is not the Bush tax cuts; it is the existence of a rapacious political class that promises more than it can deliver. If we don’t confront this underlying reality, we will leave a crushing burden for our children and grandchildren that no amount of tax-policy demagoguery can mitigate.

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