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Press Release

Deficit Fears Should Not Stop Tax Cuts


“I am in favor of cutting taxes at any time, in any way, in any form. That is the only possible way of keeping government spending from going too high.”
-- Milton Friedman

As the United States was gearing up for war in Iraq last week, a debate unfolded in the Senate that will ultimately determine the fate of the president’s $726 billion tax package. As the debate began, opponents to the tax plan offered a barrage of amendments, all targeted at reducing the tax cut or increasing federal spending. One measure that passed took a $100 billion bite out of the tax plan, setting aside the funds to cover the costs of the war in Iraq, which the administration has estimated to cost $75 billion. This week things took a turn for the worse, with the Senate passing an amendment to cut the tax plan in half and cap it at $350 billion. The amendment, which passed 51-48, called for setting aside funds for shoring up social security or deficit reduction. Yet lost in discussions over the size of the tax cut is any discussion of the increasing size of government—an issue far more important than deficit spending

On numerous occasions, Nobel-laureate Milton Friedman has argued that tax cuts are the only effective measure to discipline federal spending. In fact, the question of whether the tax cut will boost economic growth or stimulate the economy is secondary for Dr. Friedman. What is more important, and what should be the topic of debate, is the need to limit the size and scope of government, which at the federal level alone already consumes 20 percent of the nation’s output.

Deficit hawks often fail to consider this fact and are quite content to raise taxes to cover the costs of a growing government, just as long as the budget is balanced. Sen. Ernest Hollings (D-S.C.), considered a deficit hawk whose vote was critical in slashing the tax cut, is also one of Congress’s biggest spenders; in fact, according to National Taxpayers Union rankings, Hollings consistently has been one of the biggest spenders in Congress. Sen. John Breaux, who introduced the amendment, does not fare much better. Are they more worried about the deficit or the ability of Washington to spend money?

From Washington’s perspective, tax cuts are viewed as an expenditure that must compete with other federal spending programs. But tax cuts are inherently different than politically favored spending on such “must have” programs as billion-dollar farm subsidies and pet projects for the home state such as an $800,000 Olympic sports complex in New York or $1 million for a DNA bear sampling study in Montana. Such spending expands the public sector at the expense of the private sector. Politicians and bureaucrats now make decisions about resource allocation that were once made by entrepreneurs, investors, and workers in the private sector. Tax cuts actually leave resources in the private sector, and they do not sit idle; the true value Washington’s “tax expenditure” is the alternative use of those resources by the private sector.

Deficit or not, tax cuts are preferred because they reduce the size of government. Historically, balanced budgets have done little to restrict spending or limit the size of government, as demonstrated by congressional spending over the last five years. In fact, Dr. Friedman argues that the urge to spend has created “politically tolerable deficits.” Consequently, if taxes are raised or tax cuts avoided simply to balance the budget, spending quickly ratchets up to create a new deficit—albeit at a higher level of government spending and with a larger government.

As Dr. Friedman stated famously back in 1978, “I would rather have total federal spending at $200 billion with a deficit of $100 billion than a balanced budget at $500 billion.” While the numbers may be higher today, with Congress debating a $2.2 trillion budget, the analogy holds true. In fact, the increasing budget only reaffirms Dr. Friedman’s point. In 2003, as Brian Riedl of the Heritage Foundation notes, the government will spend $21,000 per household, a level exceeded only during World War II.

Concerns about the size of government are more important than concerns about deficits. The Founders created a system of limited government with the intent of maximizing individual liberty. James Madison and his colleagues carefully crafted a Constitution to restrain the growth of government. Time has eroded some of those constraints as Congress and the judiciary found creative ways to expand the size of government. Through taxation and regulation, the federal government new affects virtually every aspect of our lives. Today the federal government consumes roughly $2 trillion annually out of a $10 trillion economy. This does more than simply place a burden on the American taxpayer; at a more fundamental level, it erodes the liberty and freedom of choice that have been among America’s greatest virtues.