Home > History Repeating Itself > Higher taxes never lead to lower spending or lower deficits

Higher taxes never lead to lower spending or lower deficits

Although I am generally pleased at the idea of bipartisan attention to the coming debt bomb, the fact that the commission in charge of recommending fiscal policies to the president is bipartisan (read: entrenched bureaucrats) means that they’ll have to come up with ideas that appeal to the knee-jerkers on both sides of the aisle.  That means that, despite the fact that the deficit problem in this country is completely and totally due to the fact that spending has massively outpaced revenues, roughly half of the proposals will include “finding” new sources of revenue (read: confiscation). 

However, new research, along with a knowledge of and appreciation for the history of revenue/tax balance should give us pause.   In the Wall Street Journal yesterday was an interesting article by Stephen Moore and Richard Vedder, entitled “Higher Taxes Won’t Reduce the Deficit.”  According to the authors:

The draft recommendations of the president’s commission on deficit reduction call for closing popular tax deductions, higher gas taxes and other revenue raisers to drive tax collections up to 21% of GDP from the historical norm of about 18.5%. Another plan, proposed last week by commission member and former Congressional Budget Office director Alice Rivlin, would impose a 6.5% national sales tax on consumers.

The claim here, echoed by endless purveyors of conventional wisdom in Washington, is that these added revenues—potentially a half-trillion dollars a year—will be used to reduce the $8 trillion to $10 trillion deficits in the coming decade. If history is any guide, however, that won’t happen. Instead, Congress will simply spend the money.

History does indeed bear this out.  The WSJ article, disappointingly, mentions Ronald Reagan only once, and in passing; however, if you’re interested in a political history of government spending, deficits, and revenues, I strongly recommend reading the book The Struggle to Limit Government by John Samples of the Cato Institute.  Lest you be deterred, the book is entirely free, and available for immediate download from the Cato website.  Take advantage; you’ll be glad you did.

Mr. Samples’ insight on the Reagan presidency is very telling in this case.  Consider a passage from the book, on page 93:

Traditional Republicans had always said – and repeated the axiom in 1981 – that government should cut spending and then reduce taxes to balance the public budget.  Reagan believed the causality ran the other way: “Government spends all the taxes it gets.  If we reduce taxes, we’ll reduce spending.”

Reagan perhaps assumed that if Congress cut taxes it would also cut spending enough to keep spending and revenues roughly near balance.  He assumed, in short, that members of Congress would fear incurring deficits and raising taxes more than they would fear the wrath of those who benefited from government spending.

And with public concern about deficits as a political issue at or near historical highs, he may have had quite a rational basis for that assumption.  Indeed, his strategy amounted to: “starve the beast.”  In this strategy Reagan was both wrong and right.  He was right to note that “Congress spends all the taxes it gets.”  Indeed, despite pushing massive tax rate cuts through Congress, 1981 (Reagan’s first year in office) saw dramatically increased federal revenue – 20.8% of GNP, vs. an average of 19.2% during the entire Carter administration, and indeed, a rough average of 19% for the preceding two decades.  Yet, Reagan’s administration also saw ballooning deficits.  Congress indeed, spent all it could get its hands on and more.

Where Reagan went wrong is assuming that politicians fear deficits and the imbalance of the public funds more than they fear the wrath of the entitlement-dependent masses that may kick them out of office in the next election cycle.  Clearly, the politicians involved were far more interested in expediency than they were in common sense, and like most every relatively modern politician before and after, they decided the kick the problem down the road.  Reagan assumed that the time had come in 1981 for the public debt to force government’s hand.  Reagan was wrong.  30 years later, and we have still not only failed to force our supposedly representative government to handle the debt crisis, but we have been adding ever more to it through the Bush II and Obama years. 

To get a better handle on the philosophical reasons why, I would again refer you to Samples’ book, The Struggle to Limit GovernmentHowever, as concerns the day’s news, it is important to understand that proposals to reduce the deficit by increasing revenue are purely a fool’s errand.  No change in the debt issue will come until either voters or a crisis forces unpopular decisions.

There is no realistic middle ground.

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