Home > Bruce Bartlett, VAT > Lower Taxes Lead to Bigger Government

Lower Taxes Lead to Bigger Government

Small government advocates need to make a choice. Do they prefer lowering taxes or reducing the size of government? Confronting the common myth, Bruce Bartlett explains cutting taxes does not “starve the beast.”

When Bush took office in January 2001, we were already well into fiscal year 2001, which began on Oct. 1, 2000. He immediately pushed for a huge tax cut, which Congress enacted. In 2002 and 2003, Bush demanded still more tax cuts, even as the economy showed no signs of having been stimulated by his previous tax cuts. The tax cuts and the slow economy caused revenues to evaporate. By 2004, they were down to 16.1 percent of GDP. The postwar average is about 18.5 percent of GDP.

Spending did not fall in response to the STB [starve the beast] decimation of federal revenues; in fact, spending rose from 18.2 percent of GDP in 2001 to 19.6 percent in 2004, and would continue to rise to 20.7 percent of GDP in 2008. Insofar as the Bush administration was a test of STB, the evidence clearly shows not only that the theory doesn’t work at all, but is in fact perverse. (my emphasis)

When tax cutters decouple spending and taxes they artificially decrease the cost of government services and consequently increase the demand for those services. That is why I favor linking specific taxes to corresponding spending programs that need more constraint. For example, I’ve argued that a VAT tied to healthcare spending would be the most effective way of controlling costs. Additionally, policies like PAYGO attempt to ensure the cost of government programs will be accurate. The Republican Party – a party dedicated to cutting taxes, not small government – wants to replace that with CUTGO, which should upset anyone that actually cares about the deficit. How do “small government conservatives” expect citizens to vote for fewer services if they don’t feel like they’re even paying for them? I don’t know many people that turn down “free” benefits.

The more directly people experience the cost for a service the less they’ll demand it (unless they feel it’s truly worth it). This is why Milton Friedman allegedly came to regret helping create the income tax withholding system. Here’s Austrian/libertarian thinker Murray Rothbard,

One of Friedman’s most disastrous deeds was the important role he proudly played, during World War II in the Treasury Department, in foisting upon the suffering American public the system of the withholding tax. Before World War II, when income tax rates were far lower than now, there was no withholding system; everyone paid his annual bill in one lump sum, on March 15. It is obvious that under this system, the Internal Revenue Service could never hope to extract the entire annual sum, at current confiscatory rates, from the mass of the working population. The whole ghastly system would have happily broken down long before this. Only the Friedmanite withholding tax has permitted the government to use every employer as an unpaid tax collector, extracting the tax quietly and silently from each paycheck. In many ways, we have Milton Friedman to thank for the present monster Leviathan State in America. (my emphasis)

So the best way to get smaller government might just be to increase taxes so they reflect the true cost of programs. It’s possible if people are getting beneficial services they might just be willing to pay more for them – but in a democracy people get what they vote for: if we choose to pay for something it’s harder to argue we shouldn’t have it. At least we wouldn’t be running unsustainable deficits or passing off the cost of our benefits to others.

Tax cutting ideologues need to understand that if you cut taxes without cutting a corresponding amount of spending that doesn’t permanently lower taxes, it shifts them to the future. Just as if I purchase a $200 TV but only have $100 in my checking account, I still owe another hundred bucks – I’ll just have to raise that money later and then pay back whoever I borrowed the initial money from. Low taxes now with high spending just results in higher taxes later. If you want low taxes and small government, you need to cut spending first. Only when our “cost of living” is lower can we afford to lower our income.

Small government advocates must confront reality: making government seem cheaper will never convince Americans to choose less of it.

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