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Thanks for the Tax Cut, Sort Of

July 29, 2003

The envelope is one of those that every American dreads: something from the IRS marked "IMPORTANT." But it isn't bad news. It was good news, sort of. It is good news in the same way something from Publishers Clearing House is good news. It says that money is on its way, and if you want it, do nothing. You can't help but suspect that something is up.

Well, something is up. Keeping reading.

"We are pleased to inform you that the United States Congress has passed and President George W. Bush has signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003. This new law provides broad-based tax relief, including a $400 increase in the child tax credit for 2003 for each eligible child born after December 1, 1986."

The long and short of it is that the government is sending a check – that's right: a check good for real money – to every person with a kid or kids. Wow! Thanks, Congress! Thanks, Mr. President!

Every good libertarian should favor tax cuts. The money belongs to us in the first place, and it should be an occasion to celebrate when Washington wises up and gives some back. We've been promised a tax cut as long as memory serves, but it never seems to arrive. At last, here it is, thanks to Bush having pushed so hard for this as an economic stimulus measure.

It's almost hard to believe, almost too good to be true. From an economic standpoint, everything being equal (all economic "standpoints" should begin with that phrase), it's good for the economy too. This is not because people will necessarily spend it and thereby boost the economy (as the Bush-promoted crude Keynesianism might suggest). Rather this is because it is always a good thing for prosperity for the private sector to manage wealth, whether the money is invested, saved, or spent.

So, here's to Congress and the President. And yet…

It is a bribe. It is not as if Bush is refunding money that he has not spent. On the contrary, the Bush administration is the biggest-spending administration since LBJ, increasing the warfare state and the welfare state at roughly double the rate of Clinton (12–14% per year against Clinton's 6–8% per year).

Nor have new revenue sources magically appeared to replace the old. New revenue to the government is growing at a slower pace than it did during the 1990s, which is precisely what you might expect in an economic downturn with less economic activity to tax.

What's more, new studies show that revenue can't possibly address the existing liabilities in the system. A new book by Jagadeesh Gokhale says that the government accounts are short a mere $44.2 TRILLION. Other studies show that "the fiscal problems the country faces are unlike any other the country has faced in their origin and nature…. The unpleasant implication is that a long-term resolution of these issues that does not destroy the role of the federal government in American society will have to include significant increases in tax revenues as a share of the economy."

Whence comes this great boon from Washington? The real story, of course, is in the debt. It looks like this year the government will run a real deficit of some $550–600 billion or higher, a figure which is far bigger than the official deficit figures that already breaks all deficit records. In 2003, the debt limit was increased by $984 billion – which gives you a sense of the government's own forecast of its spending patterns.

But the deficit is an abstraction for most people. True, it drains savings and crowds out private investment. True it can end up being paid for via inflation of the money supply which causes investment distortions leading to the business cycle. True it can result in a diminished purchasing power of the dollar (again, other things being equal) and thereby represent a hidden tax.

All of this is in the future. It is hidden. The tax cut is now. It is visible. In short, it is good politics, targeted especially at those voters most likely to vote straight-ticket Republican. In some ways, then, what the political left says is true: this is a bribe to voters! In some ways, it is hard to admit because libertarians like to think of themselves as pro-tax cut.

And yet what can we say when the government cuts taxes and yet increases the total real tax burden in the long run? There's a name for this when individuals do it: extreme profligacy.

The problem with that word, of course, is that it implies that the government is a household with income and outflow and thus bears the burden of "fiscal responsibility." It doesn't really, of course. It has the Federal Reserve as a back up so that it never needs to default on its loan obligations. The states do not have central banks, which is why they are cutting budgets and raising taxes. This seems like a more honest approach.

Metaphors never really work when it comes to government finance, but let's try this one out. Let's say you loan a friend some money and he finally gets around to paying you (this is Bush's tax cut). You say, thanks, but where did you get the money? He says, well, he took out a loan from the bank (here's the debt increase).

Now, that makes you vaguely uncomfortable but you might still be glad to have the cash in hand. But what if it turns out that he forged your signature on a co-signed note? In other words, what if you are actually responsible for paying the debt? Far from being glad that he paid you back, you now want to wring his neck! You realize that his apparent act of honesty is actually a hoax masking a great act of dishonesty.

This is effectively what the Bush administration has done with this tax cut. To give it to you, he has taken out a loan that you have co-signed – without being asked. The only real difference here is that he doesn't tell anyone that. Instead, he sends his budget director and his chief economist out to tell everyone that the debt is actually quite small and no big deal at all.

As a lifetime advocate of tax cuts, it is extremely disconcerting to meet a tax cut in real life and greet it with profoundly mixed feelings. What we see here is that even the best policies can be wrecked when the government gets hold of them. Far from being a step toward liberty, these tax cuts represent a trick to move the pea from one shell to another in the federal sleight of hand.

Another ominous thought: how is what Bush is doing any different from what Reagan did in 1981? Here too we had a president who cut taxes in a way that was especially favorable for his constituents. He did it at the same time he vastly expanded the welfare-warfare state. And he did it by massively expanding debt. Perhaps the left was right all along about his fiscal policies.

Whatever the case with Reagan, the game is far more transparent with Bush.

Must we still favor tax cuts? Most certainly. Should politicians vote for them? Surely. But we must never be manipulated by them. We must see through to the true cost of government, which is not going down but up! Frankly, it would be a more honest approach to admit the true tax burden and stop with all the antics.

The proper voter response should be: thanks for the tax cut, but we know the score. This is a trick. Balance the accounts too, and stop lying about it.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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