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Taxing Logic

Wednesday, February 28, 2007

Those who want to fund new spending with higher rates should acknowledge the future failure their logic presumes.

Sebastian Mallaby—one of my favorite columnists—recently argued in the Washington Post for a policy that combines higher taxes with a more determined push for freer trade. Mallaby wants these tax revenues to be used to fund programs that reduce people’s fear of globalization. As Mallaby sees matters, “knee-jerk opposition to raising taxes is misguided. The government could and should spend more on making health care portable and retraining displaced workers. That is a much better bet than protectionism.”

We can argue about how well such government-funded programs will succeed in achieving their stated purposes. Dartmouth economist Douglas Irwin, for example, reports that the evidence is against the notion that worker-retraining programs deliver much in the way of genuine worker retraining. But whether or not government programs aimed at relieving voters’ fears about globalization really make people’s lives more secure can be regarded as being of secondary importance if these programs are believed by voters to make globalization less threatening.

Mallaby might well be correct that having more such programs is a worthwhile price to pay if they are necessary to get freer trade.

But Mallaby is incorrect to assume that such programs require higher taxes.

Money (250)Uncle Sam today takes from Americans' pockets about $2.5 trillion per year. In real dollars, this sum is 54 percent higher than what Bill Clinton's government took during its first year in office ($1.62 trillion) and ten percent higher than what George W. Bush's government took during its first year ($2.28 trillion).

If we go back in history just a bit further – say, to Jimmy Carter’s last year in the White House – we find that Uncle’s Sam’s tax revenues today are nearly twice what they were a mere 27 years ago. Twice! Remember, these figures are adjusted to correct for inflation.

Surely, Uncle Sam cannot legitimately assert that he has on hand insufficient tax revenues to fund worker training, health-care portability, and any other programs plausibly useful in allaying voters’ fears of globalization.

Ah, but isn’t the federal government chin-deep in debt, back now to running gargantuan annual budget deficits? Yes, it is—a few billion times yes. This (regrettable) fact, however, hardly justifies raising taxes. Funds for worthwhile programs can be gotten instead by cutting spending elsewhere.

It is simply implausible that almost all of the nearly $3 trillion that Uncle Sam now spends annually is spent wisely and on programs of genuine usefulness. Instead of calling for higher taxes, why not seek funds for useful programs by calling for the elimination of farm subsidies? For ending the war on drugs? For selling off what is valuable in Amtrak and scrapping the rest? For privatizing the U.S. Postal Service and the FAA’s air-traffic-control operations? For deep-sixing the Small Business Administration? For quashing all earmarks?

Reasonable people disagree over which programs should be cut. But surely only the most naïve and uninformed romantic supposes that an annual budget closing in on $3 trillion cannot be trimmed by hundreds of billions of dollars—trimmed of fat whose only real purpose is to gratify greedy special-interest groups. In his 2005 book Downsizing the Federal Government, the Cato Institute’s Chris Edwards identifies more than $380 billion in direct budgetary expenditures that should be cut, devolved to state governments, or privatized.

It is simply implausible that almost all of the nearly $3 trillion that Uncle Sam now spends annually is spent wisely and on programs of genuine usefulness.

As a chunk of change, $380 billion is, as my nine-year-old son would exclaim, ginormous! It’s $1,267 for every man, woman, and child in America. And note that Edwards found this sum in the 2005 budget. The current budget, in real dollars, is a whopping 15 percent larger than its predecessor of just two years ago.

An advocate of higher taxes might respond that political realities prevent any but the most trifling cuts in government spending. So if we’re to fund those programs necessary to smooth the way for freer trade (or to fund any other new programs judged to have merit), we have no practical, responsible alternative to raising taxes.

Central to this argument is the recognition that once a program is launched, eliminating it, or even trimming its budget, becomes unduly difficult. That is, government programs—even those created for sound reasons—stubbornly live on regardless of their merits. If this ratcheting effect is real, then asking taxpayers to fork over even more of their money to create yet even more programs is rather awkward for anyone who cares about fiscal sanity. Why should citizens be forced to turn over a greater portion of their incomes to an institution that cannot be relied upon to spend money wisely?

If, on the other hand, this ratcheting effect does not exist, then persons like Mallaby who call for higher taxes must first explain why the funds required to launch new and worthwhile programs cannot instead be gotten by trimming or cutting existing programs. Surely, paying for new programs with funds transferred from wasteful programs is preferred to raising taxes while keeping in place funding for unjustified budget items.

In recent years, pundits on the left have delighted in accusing free-market advocates who press for tax cuts of doing so mindlessly. Left2Right blogger Neil Buchanan, for example, complained about the GOP being "addicted to tax cut politics."  But the undeniable, indefensible addiction at the center of this problem—suffered, regrettably, by some on the right as well as the left—is an addiction to spending. It keeps even boondoggle programs funded.

Anyone who thinks that obstacles to budget-cutting make tax hikes the only practical way to fund new programs must acknowledge that his own favored project will, in time, likely join the list of wasteful holdovers from previous eras. Some spending initiatives, no doubt, are so good that they are worth starting even though they will eventually live on as useless line items. But that’s a tough burden to meet—and one that is seldom recognized by those who favor more spending.

Image credit: "Money" by Flickr user AntiochOG

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