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"Collecting more taxes than is absolutely necessary is legalized robbery."
—President Calvin Coolidge
At FreedomWorks, we have a saying that goes, “Lower Taxes + Less Government = More Freedom”. It’s a fairly simple, yet effective formula with an end in mind that virtually all Americans would agree is desirable. So why is it so difficult to accomplish in the modern political world? The answer boils down in part to the difference between how the federal government treats tax cuts and spending hikes.
Today, it’s popular among Democrats to bash the “Bush tax cuts”. Since cutting taxes is almost always politically popular, savvy Democrats focus on the cuts for higher-income Americans. The argument goes that by lowering taxes, particularly for people who didn’t really need it, the federal government also lowered revenue, and that this drop in revenue was the major cause for the enormous deficit and skyrocketing national debt. On the face of it, the argument is simple, intuitive, and effective. It seems obvious that if a country has lower taxes, government will take in less money. It’s an elegant way for Democrats to advocate raising taxes and at the same time place blame for the deficit and debt on the Bush administration and Republicans in Congress. However, let’s test this argument by taking it to the extreme: What if you raise the income tax to 90%? Or even 100%?
People won’t work, or at the very least they’ll work significantly less than they did before. If you only receive a tiny fraction of the monetary reward for your work, you just don’t work as hard or as much, if at all. The less you work, the less of your income can be taxed away, lowering revenue. Taken to the other extreme, a 0% income tax obviously won’t bring in any revenue. Therefore, the revenue-maximizing tax rate is somewhere between these two extremes.
This is a simplified version of the argument popularized by economist Arthur Laffer, whose graph of this phenomenon is commonly referred to as the “Laffer curve”. During the Reagan presidency, the Laffer curve played a significant role in guiding the public policy which helped lead to widespread prosperity. Economists disagree over what exactly is the revenue-maximizing tax rate, or if there even is one that may be broadly applied across various levels of income or to different countries. Still, the point here is that to a certain point, cutting taxes can increase revenue, which means that the argument made by Democrats today isn’t as obvious or irrefutable as it may seem.
Still, even if one concedes that perhaps the Bush tax cuts lowered tax rates below the revenue-maximizing point, is that really such a bad thing? Should the government extract every last dollar possible from the American people? After all, the revenue-maximizing tax rate isn’t necessarily the optimal tax rate. Considering the spendthrift policies over the last decade since the institution of the tax cuts, it would appear likely that the additional revenue would have simply emboldened Congress to spend even more. Besides, even in 2003, the year with the lowest federal revenue following the start of the Bush tax cuts, the federal government still took in $1.782 trillion dollars in revenue, which was more than it took in only five years prior in 1998. (Source: OMB historical tables)
Revenue quickly bounced back, however, and by 2005 it had grown to $2.153 trillion dollars, which was more than $100 billion dollars higher than the previous mark set in 2000 before the tax cuts. Revenue continued to rise despite the lowered taxes until 2008, the beginning of the recession. So, the tax cuts certainly did not cripple the budget in any truly substantial and prolonged manner. Tax cuts did not create the debt, spending did. Trillions of dollars in debt come from spending trillions of dollars more than you take in. When Congress decided to pass a law cutting taxes across the board for Americans, they ought to have been responsible with spending until they could see how the tax cuts would affect revenue long-term. Instead, they continued to spend without restraint.
The tax cuts allowed Americans of all incomes to save more of the income they earned from being redistributed by government bureaucrats. So, why do the” Bush tax cuts” continue to be maligned by the Democrats and in the media? It’s fairly simple. First, as mentioned before, it’s a way for Democrats to advocate raising taxes, particularly on the wealthy, while at the same time making an excuse for their part in creating the debt and deficit. Second, and perhaps more importantly, these tax cuts have been cursed with the label of a highly unpopular president, even today. Despite the fact that it was Congress who voted these on these bills, President George W. Bush’s advocacy for the tax cuts tied his name to them from the start. One could say that this was a nifty rhetorical trick by the Democrats, as they manage to continue blaming current political issues on the former president. However, Republicans have largely played along and also refer to them as the “Bush tax cuts”. In other words, the Republicans have failed to win the public relations battle and barely tried to fight it in the first place.
Still, these tax cuts began more than a decade ago. Why are they still temporary? Why are they still an important political issue? The main reason is the “sunset” provision placed in the bill, which meant that the tax cuts would be revoked if not extended by Congress after a certain period of time. As badly as the Republicans lost the public relations battle over the “branding” of the tax cuts, they essentially lost the war by agreeing to these provisions. Why would across-the-board lower taxes for all Americans be temporary? When the federal government still takes in, at the least, close to two trillion dollars a year in revenue after the cuts are made, why are the cuts still considered controversial?
The problem lies with how the federal government treats spending. Whereas tax cuts are considered temporary and require periodic extension, spending assumes a certain baseline amount and only increases from there. The culture in Washington is so distorted that bureaucrats feel a need to spend every last dollar budgeted to them and then plead for more besides that. If you come in under-budget on a project in many federal agencies, you’ll simply receive a smaller budget next year. If you use the entirety of your budget, then your agency clearly needs additional funds. Next year’s budget will almost automatically add those extra dollars, making the bureaucrat’s job easier instead of forcing them to be efficient with their allotted cash. This breeds a culture of inefficiency and waste that culminates into larger and larger federal outlays.
Considering the inexorable impulse of the bureaucracy toward increases in spending, perhaps it should not be a surprise that any drop in revenue would be considered a crisis by Democrats who sincerely believe in the goals of these bureaucrats. After all, the bureaucracy needs that money, doesn’t it? Increased spending therefore becomes permanent and inevitable.
The contrast between how Washington treats tax cuts and spending hikes paints a bleak picture. In a sensible society, wouldn’t it be the tax cuts that are typically permanent and the spending hikes that are temporary and which require periodic justification in order to be extended? Luckily, there’s a simple solution to this mess: Cut spending. The grassroots-generated Tea Party budget slashes $9.7 trillion dollars in spending over the next ten years, balances the budget in four years, and makes the so-called “Bush tax cuts” permanent. It accomplishes these seemingly impossible feats without raising taxes.
Let’s consider the FreedomWorks equation one more time: “Lower Taxes + Less Government = More Freedom”. We know that we as Americans want more freedom. The tax cuts achieved the first element of the equation and it’s time to add the second element by cutting spending, thereby decreasing the size and scope of the federal government. Only then will Americans have more freedom from an enormous national debt, massive deficit, and heavy tax burden.
If you would like to learn more about the Tea Party Budget, here is the link.