March 21, 2001

March 21, 2001 | Commentary on Taxes

A Trigger...For Bigger Government

The budget surpluses over the next 10 years are expected to reach $5.6 trillion, yet Washington insiders are screaming that President Bush's modest $1.6 trillion tax cut is too big. But if anything, it's too small. The Bush tax cut is only about half the size of the Kennedy tax cut in the early 1960s -- compared to the size of the economy at the time -- and only one-fourth the size of the Reagan tax cut in the early 1980s.

So tax-cut opponents have composed a new siren song: a "trigger" scheme to make tax cuts conditional. Under this approach, the Bush tax cut would be repealed and taxes increased automatically if politicians spend too much money and projected surpluses don't materialize.

This may sound prudent, but any kind of trigger or other form of automatic tax increase would be a huge mistake. Here's why:

Less Growth. Triggers would undermine the economic rationale for cutting tax rates in the first place. Lower rates encourage people to engage in productive economic behavior. But if workers, investors, and entrepreneurs understand that the tax cut is iffy -- and can become a tax increase if politicians spend too much -- they'll logically adopt a "wait-and-see" attitude. Making tax cuts contingent on future political decisions will discourage the kind of private-sector working and investing we need to get our economy moving again.

Smaller Surplus. Conditional tax cuts create a self-fulfilling prophecy. Lawmakers who oppose tax relief insist on a trigger because they're worried the economy will perform below expectations and that this will mean less debt reduction. Yet the very existence of the trigger will greatly dampen the pro-growth effect of lower tax rates, making it more difficult to achieve the debt-reduction goals these trigger advocates say they support.

More spending. A conditional tax cut also could create perverse incentives on the spending side of the equation, particularly if the tax cut is linked to a specific surplus and/or debt number. Knowing that a tax cut would go into effect -- or perhaps be suspended -- only if the surplus didn't reach a certain level or the debt didn't fall by a specified amount, some politicians would have an even greater incentive to boost federal spending. Those who favor bigger government effectively would be able to hold tax relief hostage.

Budget gimmicks. A trigger would encourage federal lawmakers who favor big government to manipulate the budget process. If the trigger is based on future estimates of debt or surplus, these politicians can simply distort budget projections -- underestimating the surplus, for example -- to pull the trigger. If the trigger is based on "after the fact" budget data, they can shift a certain amount of spending from one year to the next to achieve the same effect. A small amount of smoke-and-mirrors may be acceptable in the pursuit of good policy. But in the pursuit of bad policy such as a tax-cut trigger, these gimmicks add insult to injury.

Higher taxes. Finally, it's worth considering why and how a trigger would take effect. Besides more spending, the most likely scenario is that the economy suffers a downturn. This would reduce projected tax collections because of fewer jobs, lower income and reduced profits. Is this really the time that lawmakers would like an automatic tax increase to take effect?

A better option, particularly for lawmakers who want to see surpluses grow and debt shrink, is to restore meaningful spending caps enforced by something known in Washington as a "sequester" -- an automatic spending reduction that would limit the total growth of government spending. And unlike tax-cut triggers, sequesters can work. During Reagan's second term, a modest sequester required by the Gramm-Rudman Deficit Reduction Act significantly slowed the growth rate of federal spending.

Delaying tax cuts is a bad idea. Making tax cuts conditional on other events is even worse. And imposing an automatic tax increase is the worst idea of all. Triggers are a way of dampening the economic benefit of tax cuts. They are, in effect, a poison pill that may create a self-fulfilling prophecy that tax-cut opponents can use to their political advantage. President Bush shouldn't let his tax cut be sabotaged by those who want his program to fail.

Daniel J. Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation (www.heritage.org).

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

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