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If spending isn't cut, taxes will rise

By W. James Antle III
web posted June 2, 2003

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 to 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 programs.

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.

W. James Antle III is a senior editor for Enter Stage Right.

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