Here’s one for your counterintuitive thoughts file: Do
the Bush tax cuts promote big government? In
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 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.
expressed do not necessarily reflect those of PoliticalUSA.com.