By William F. SHUGHART II
Grover Norquist has become one of Washington’s favorite whipping boys, but taxpayers owe him thanks for focusing needed attention on the real problem in Washington: excessive spending, rather than too-little taxing.
Norquist’s “No Tax Pledge” does exactly that.
Excessive spending is the cause of Washington’s unprecedented trillion-dollar budget deficits in recent years and spending is the best measure of the burden the federal government imposes on the economy.
Federal spending reallocates scarce resources from individuals and businesses to the public sector. And federal spending, by draining these resources from the private economy, where they would be put to their highest productive use, is at least partly responsible for the “Great Recession” and anemic recovery.
Size of government
How government finances it’s spending — through current taxes or by borrowing — is of second-order importance. What is important is the huge size and cost of the federal government.
The predictable political solution to this problem is to raise taxes, especially on the “rich,” who supposedly are not now paying their “fair share” of the cost of government. This, according to the conventional wisdom, will increase revenues and bring the budget closer to balance.
Given that only about half of American households pay any federal income tax nowadays, the numbers simply do not work.
And even if they did, raising taxes on high-income earners will create incentives for them to sidestep the higher taxes by establishing charitable foundations, moving their money offshore, or adopting other tax-avoidance schemes.
There is considerable evidence, beginning with President John F. Kennedy’s tax cuts, that lower marginal individual income tax rates at the upper end of the income scale produce more income tax revenue.
However, as both President Kennedy and, later, President Ronald Reagan learned to their chagrin, lower tax rates lead to larger budget deficits unless they are accompanied by spending restraint.
In theory, a balanced federal budget can be achieved in two ways. One way is to raise tax rates in the faint hope of generating more tax revenues, thereby erasing some of the red ink. The other way is to cut spending.
The first option obviously imposes an additional drag on private economic activity. Less disposable income is available to households to spend on goods and services and to private businesses to invest in expanding plant capacity and hiring more workers.
Since consumers and producers contribute to wealth creation and economic growth, raising taxes is a recipe for continued stagnation.
Moreover, higher tax revenues shift responsibility for economic growth from the private economy to the public sector, the latter of which has proven repeatedly that bureaucrats and politicians are incapable of “investing” the taxpayers’ money wisely. Solyndra, the Chevy Volt and bailouts of too-big-to-fail financial institutions are cases in point.
Nobel laureate economist Milton Friedman once said that he preferred a small, unbalanced federal budget to a large, balanced one. His preference recognized that, while taxes and federal government borrowing impose significant burdens on the economy, their negative effects are swamped by the impacts of the spending programs they finance.
Grover Norquist is spot-on. No matter how public spending is financed, higher taxes just kick the can down the road. The disorder in the federal government’s fiscal house can be set right only by getting rid of spending programs that America’s taxpayers can’t afford. There are plenty to go round.
Signing Norquist’s “No Tax Pledge” doesn’t mean opposing all changes in the federal tax code; it merely means looking to spending cuts, first, and then to reforming our Byzantine IRS tax apparatus for collecting them.
Republicans, especially, and all of us owe Norquist thanks, not condemnation.
William F. Shughart II is a senior fellow with the Independent Institute in Oakland, Calif., and the J. Fish Smith professor in public choice at Utah State University. Distributed by MCT Information Services.
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