To read most
media accounts of a certain Treasury Department report “shelved” by the White
House, one might get the impression that $44.2 trillion in future budget
deficits are being projected because taxes are too low. The premise
seems to be that if “budget-busting” tax cuts like the one President Bush
just signed into law – in reality, representing a small fraction of anticipated
federal revenues over the next ten years – had not been enacted, we could
avert the coming catastrophe.
Reading the fine print more carefully, it becomes apparent that these projected
deficits are actually rooted in a staggering amount of federal entitlement
spending. As the newspaper that dropped this bombshell, the Financial Times
of London, reported that the study was the “most comprehensive assessment
of how the US government is at risk of being overwhelmed by the 'baby boom'
generation's future healthcare and retirement costs." In
other words, we have promised benefits and assumed burdens that we cannot
afford. The problem is not reckless tax cutting; it is reckless Medicare
and Social Security systems about to collide with demographic reality.
Trying to square this circle may result in the imposition of a colossal tax burden. According to the Financial Times,
the report “estimates that closing the gap would require the equivalent of
an immediate and permanent 66 percent across-the-board income tax increase."
A tax increase of that magnitude would inevitably exact a horrible price
to be paid in lost jobs, wealth and economic opportunity.
Yet tax increases are precisely what will be in store if some control is
not imposed on runaway federal spending. If entitlements are
not reformed and the American welfare state continues to assume new unsustainable
responsibilities, we will endure high tax rates and low levels of private
sector dynamism that resemble the stagnant welfare states of Europe.
Republicans will not be able to continue credibly cutting taxes as entitlement
programs on autopilot threaten to bankrupt the nation.
But today’s policy debates largely ignore these facts. Democrats and
Republicans disagree about the economic desirability of tax cuts while taking
continued increases in federal spending for granted. President Bush
has shown some willingness to contemplate bold free-market reforms of both
Social Security and Medicare, but he hasn’t done much to promote either and
the amount of cost savings his embryonic proposals would entail remains unclear.
Serious entitlement reform, with its attendant political risks, is likely
to be off the table at least through the 2004 election. In the meantime,
a Republican-controlled Congress continues to compound the entitlements problem
with a dizzying discretionary spending binge unconstrained by the White House.
Only a handful of backbenchers ineffectually grumble about the current state
of affairs. The most visible self-proclaimed “budget hawks” are merely too
opposed to significant tax reductions, not high spending. Fiscal responsibility
and deficit reduction are not so much legitimate concerns of themselves as
weapons with which to bludgeon proposals to cut marginal tax rates.
Everyone, including Bush, is still willing to entertain the idea of creating
new entitlements, most notably a prescription drug benefit for Medicare recipients.
Supply-siders are deluding themselves when they claim the economic growth
stimulated by tax rate cuts will solve the problems caused by uncontrolled
spending. It is certainly true that supply-side policies can enlarge
the tax base and accelerate economic growth, resulting in far more revenue
than unrealistic static estimates forecast. It is equally true that
growth stimulated in part by tax cuts has helped balance the budget in the
past, most recently during the heady surplus days of the late ‘90s.
But it is unrealistic to assume that we will be able to simply grow our way
out of the fiscal problems that will accompany the baby boomers’ retirement
by cutting tax rates that are considerably further from the prohibitive range
on the Laffer Curve than when Ronald Reagan led the supply-side charge over
20 years ago. Constant federal program expansion is fundamentally incompatible
with low taxes; at some point, government spending has to be paid for.
The Reagan experience convincingly demonstrates the futility of trying to
limit government through tax cuts without commensurate spending cuts.
When Reagan was elected, marginal tax rates were much higher and more economically
self-defeating. His tax rate cuts did help set off a phenomenal period
of sustained growth. Federal revenues did increase. Even the
deficit, as a percentage of GDP, began to decline as the Reagan boom went
into full swing. But Republicans were still unable to prevent taxes
from going up. The first deficit-reduction tax hike was signed into
law by Reagan himself a year after his record tax cuts. Then in 1990
and again in 1993, marginal tax rates were increased.
As the deficit grows, so will public pressure to do something about it notwithstanding
the repeated assurances of some alleged fiscal conservatives that government
borrowing and debt don’t matter. If both parties remain committed to
increased spending, the likeliest result is once again higher taxes.
Both tax increases and spending cuts are politically risky, but the Democrats
are willing to take chances to achieve the former while Republicans seldom
are to accomplish the latter. Granted, even half-hearted Republican
attempts to reign in spending are savaged by the media while raising taxes
is at times portrayed as a politically courageous act. It is true,
as David Hogberg pointed out in a perceptive column for The American Prowler,
that conservatives continually lose “the deficit game.” But if
the GOP can withstand a little bad press long enough to cut the capital gains
tax, it can hold out long enough to eliminate a few useless and unconstitutional
The fact that the tax increases might not help reduce the deficit will not
stop them from coming. The deficit ballooned after the 1990 promise-breaking
tax hike President George Bush the elder signed into law, at least arguably
because of its negative effect on the economy. The relevance of Bill
Clinton’s 1993 tax increase to the temporary elimination of deficits toward
the end of that decade is overstated to say the least. A 66 percent
across-the-board tax increase would likely depress growth enough to lose
revenue, despite the projections of government accounting gnomes. No
failure on the part of tax raisers in realizing their goals ever makes them
change their party line that all fiscal problems stem from the American people
– and particularly the dreaded rich - being taxed too little. Why,
look at our tax rates in comparison with Sweden’s!
Deficits and high taxes are being about like they are alternatives to each
other. Instead they are symptoms of the same problem: Having more government
than we can afford and than taxpayers should reasonably be expected to pay
for. As R. Cort Kirkwood wrote in an article appearing on the website
for Chronicles magazine, “The problem is collectivist politicians
and unconstitutional government. And the required repair is no mystery.
Get rid of both.”
Such common sense nevertheless appears to be too radical a solution for a
political class addicted to working Americans’ wallets. As long as
government spends without restraint, taxes will be pushed upward. The
recent tax cuts tax cuts were a victory not just for the president but also
for the taxpayers. But if government spending continues to be ignored,
fiscal conservatives may find all their victories to be relatively short-lived.
James Antle III is a Senior Editor for EnterStageRight.com
and a primary columnist for IntellectualConservative.com. He is a freelance
writer from Boston, Massachussetts.
W. James Antle III
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