- The Washington Times - Sunday, March 14, 2004

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 during the surplus years?). But it’s mostly because long-run deficits are caused by growth in government spending.

Tax cuts certainly aren’t to blame. From 1951 to 2000, federal tax revenues averaged 18.1 percent of gross domestic product (GDP). Tax-cut opponents often imply President Bush’s tax cuts emptied government coffers and created long-term fiscal chaos. But the Congressional Budget Office (CBO) projects tax revenues for 2012-2014 will average … 18.1 percent of GDP. It doesn’t take a math whiz to realize it is absurd to claim tax cuts cause long-run deficits when tax revenues will mirror their long-term average. (This analysis, by the way, assumes the tax cuts are made permanent.)

Critics note 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 tax revenues soon will return to historical norms, averaging 18.1 percent of GDP over the 2007-2009 period.

Incidentlly, this does not mean 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, we can’t truthfully blame 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 retiring. 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 — whether they get it from taxes or borrowing — they take 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 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 with a giant surplus. Government programs deprive the private sector of resources that could be used to boost jobs and growth. This is why we should cut “discretionary” spending and re-examine entire programs, agencies and departments. Lawmakers also should reform entitlement programs, partly 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 higher taxes tend to encourage more government spending and hurt the economy — and both 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 spare our children and grandchildren 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.

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