The charges lodged against the 2001 and 2003 tax cuts are
deceptively simple: They have dramatically reduced government
revenues, causing big, long-term deficits that will hurt the
economy by driving up interest rates.
But it's a case that doesn't withstand scrutiny. This is partly
because of the tenuous relationship between deficits and interest
rates. (If deficits have such an adverse effect on interest rates,
why are the rates lower today than they were during the surplus
years?). But it's mostly because long-run deficits are caused by
the growth of government spending.
Tax cuts certainly aren't to blame. From 1951 to 2000, federal tax
revenues averaged 18.1 percent of gross domestic product. Tax-cut
opponents frequently imply that Bush's tax cuts have emptied
government coffers and created long-term fiscal chaos, but the
Congressional Budget Office (CBO) projects that tax revenues for
2012-2014 will average … 18.1 percent of GDP. You don't have
to be a math whiz to realize how absurd it is to claim that tax
cuts cause long-run deficits when tax revenues will mirror their
long-term average. (This analysis, by the way, assumes that the tax
cuts are made permanent.)
Critics note that tax revenues currently fall below 18.1 percent of
GDP. But this is a short-term phenomenon caused by the recent
recession and the temporary stock market-driven collapse of tax
revenues from capital gains. No one expects these short-term
factors to last. The CBO, for instance, estimates that tax revenues
soon will return to historical norms, averaging 18.1 percent of GDP
over the 2007-2009 period.
This does not mean, incidentally, that tax revenues should always
be 18.1 percent of GDP. It is just a coincidence that average
revenue collections and future revenue projections are identical as
a share of national economic output. It does mean, however, that we
can't truthfully pin blame for future deficits on the tax
cuts.
Deficits, however, are not the issue. The real problem is
government spending, and we should view rising deficits as a
symptom of Washington's profligacy. The spending crisis is both a
short-term and a long-term problem. Federal spending has jumped
dramatically in recent years, climbing from 18.4 percent of GDP in
2000 to more than 20 percent of GDP in 2004 (and less than half of
that increase can be attributed to national defense or homeland
security).
But this short-term expansion of the federal government's burden is
minor when compared to what will happen after the baby-boom
generation begins to retire. Without reform, huge unfunded promises
for Social Security and Medicare benefits will cause federal
spending to rise sharply. (And lawmakers last year made the problem
worse by creating a new entitlement for prescription drugs under
Medicare.)
Bigger government, though, is economically harmful. When
politicians spend money, regardless of whether they get it from
taxes or through borrowing, they're taking it from the productive
sector of the economy. This might not be so bad if lawmakers used
strict cost-benefit analysis to determine if the money was being
well-spent -- particularly when compared with the efficiency of
private sector expenditures. Unfortunately, that rarely happens.
Instead, politicians allocate funds on the basis of political
rather than economic considerations. This inevitably weakens
economic performance.
Lower spending would be a good idea even if we had a giant surplus.
Government programs deprive the private sector of resources that
could be used to boost jobs and create growth. This is why we
should cut "discretionary" spending and re-examine entire programs,
agencies and departments. Lawmakers also should reform entitlement
programs, in part to reduce long-term budget pressures but also
because the private sector is better at providing health care and
retirement income.
Today's deficit debate is largely a charade. The proponents of big
government shed crocodile tears about the deficit because they want
higher taxes. Yet historical evidence clearly shows that higher
taxes tend to encourage more government spending and hurt the
economy -- and both of these factors can cause the deficit to climb
still higher. Worse, higher taxes would hurt U.S. competitiveness,
making America more like France and other European welfare
states.
To save our children and our grandchildren from such a fate, we
should keep cutting taxes and finally get serious about reducing
the burden of government spending. That may not carry the political
allure of vilifying tax cuts -- but at least it's accurate.
Daniel J. Mitchell is the McKenna fellow in political
economy at The Heritage Foundation.
Distributed nationally on the Knight-Ridder Tribune wire