Higher Taxes, Smaller Government?

It comes as no surprise to hear anti-tax activist Grover
Norquist talk about tax cuts, but it does come as a surprise to
hear him raise the subject of pink unicorns.
Pink unicorns are purely imaginary—a trait he says they share
with the spending curbs that Republicans hope to get from the
administration in exchange for a tax increase. Norquist says
Democrats only want to enlarge the government and his GOP allies
would be naive to make any deals with them.
History, he says, vindicates him. Congressional Democrats, he
told National Public Radio, “cheated Reagan, OK, and they said
we’ll cut $3 of spending for every dollar of tax increase. Spending
went up, not down. They did the same thing to Bush a few years
later in 1990.” Reagan and Bush traded for a pink unicorn and
didn’t get it.
In this view, the only way to make politicians behave frugally
is to reduce taxes and revenues. “If you raise taxes, they just
spend it,” he said.
That is often true. But it’s apparent that if you reduce taxes,
the politicians will also spend more. Ronald Reagan won big tax
cuts, and federal spending rose by more than 20 percent, adjusted
for inflation. George W. Bush did the same, and the budget
ballooned. If tax increases aren’t a sure thing, neither are tax
cuts.
In his review of history, Norquist omits the one time in the
past four decades when the budget actually came into balance: the
1990s. Why? Because it badly undermines his case.
Under Bill Clinton, income tax rates rose. In fact, his critics
reviled him for enacting “the biggest tax increase in American
history.” Yet the tax hike did not open the spending floodgates. In
inflation-adjusted terms, federal outlays grew very slowly, and as
a share of the economy, they shrank dramatically—from 21.4 percent
to 18.2 percent, about what they were during the Eisenhower
administration.
Why did that happen? Not because Clinton was a tightfisted
Scrooge eager to dismantle big government, but because
congressional Republicans, led by Newt Gingrich, forced him into an
agreement to balance the budget, which required constraints on
spending.
Under Clinton, total federal expenditures grew by just 1.5
percent per year, inflation-adjusted—40 percent less than under
Reagan and 70 percent less than under George W. Bush. And did
George H.W. Bush really get snookered? During his presidency,
spending growth was only slightly higher than under Clinton.
Most conservatives are of the “starve the beast” school, which
says that if you deprive the government of revenue by cutting
taxes, it will be forced to shrink. That would be true if the
government couldn’t spend money it doesn’t have. In fact, it does
so year in and year out. There is no point cutting off a wayward
teen’s allowance if he still has your credit card.
In 2006, a study published by the late economist William
Niskanen debunked this theory of spending dynamics. Niskanen, who
was Reagan’s chief economist and chairman of the libertarian Cato
Institute in Washington, looked at the historical data and found
that revenue increases actually curtailed spending growth. Revenue
reductions, however, caused it to accelerate—the exact opposite of
what Norquist claims.
University of Alabama political scientist Michael New later took
another look at the evidence and confirmed those findings. “Like
Niskanen, I find statistically significant evidence that low levels
of federal revenues actually stimulate expenditure growth,” he
wrote in The Cato Journal in 2009.
It’s not hard to see why. Americans are more likely to support a
bigger federal budget if they don’t have to pay the full cost each
year. Tax cuts allow us to get $100 worth of programs and services
for only $80. As with any commodity, price discounts increase
consumption. Tax increases force us to pay something closer to the
real cost of government, which dampens demand for it.
We fought two wars without raising taxes to pay for them. If
Americans had known that invading Iraq was going to cost them real
money, right away, they would have said: No, thanks.
Tax increases don’t produce automatic improvement, particularly
with a president who shows minimal interest in budget cutting. If
Republicans want to curb spending, they will have to insist on
clear, enforceable measures to induce greater discipline, and stick
to them. That’s not the easiest thing to achieve. But unlike a pink
unicorn, it’s happened before.

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Higher Taxes, Smaller Government?


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