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Home | Blog | Tax Cuts Without Spending Cuts Are Pointless

Tax Cuts Without Spending Cuts Are Pointless

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02/11/2016

As this election cycle has demonstrated yet again, Democrats are not shy about calling for tax increases. In every election cycle they call for more taxes, whether through corporate taxes (to tax "the rich") or through increases to the income tax via Obamacare "penalties." Republicans, on the other hand, like to pledge to not raise taxes.

But, limits on taxes are only of value if government spending is curtailed at the same time. If government spending is not limited, then the taxpayers will ultimately pay for that spending anyway, whether through future interest on new government debt, or via the stealth tax of inflation caused by the new money created to cover the shortfall. In other words, every increase in spending is an increase in taxes, whether official tax rates are increased or not.

Earlier this week, we looked at how government spending has tended to increase at least as much under Republican presidents as it has under Democrat presidents. Moreover, Republican control of Congress has apparently done nothing to stem government spending either. And lest anyone need a more recent and specific example, we need look no further than the GOP's recent budget deal which is a veritable smorgasbord of government boondoggles. But the GOP didn't raise any tax rates in the process, so it's all fine, right?

If only that were the case. In reality, government spending is a problem not just because it requires taxes or leads to debts that must be repaid by the taxpayers in some fashion. It's a problem because government spending distorts the economy and punished ordinary people at least as much as taxes do in the first place.

In Man, Economy, and State, Murray Rothbard explained the error of focusing on taxes while ignoring government spending (p. 910):

There has also been a great amount of useless controversy about which activity of government imposes the burden on the private sector: taxation or government spending. It is actually futile to separate them, since they are both stages in the same process of burden and redistribution...

[S]suppose the government taxes the betel-nut industry one million dollars in order to buy paper for government bureaus. One million dollars’ worth of resources are shifted from betel nuts to paper. This is done in two stages, a sort of one-two punch at the free market: first, the betel-nut industry is made poorer by taking away its money; then, the government uses this money to take paper out of the market for its own use, thus extracting resources in the second stage. Both sides of the process are a burden. In a sense, the betel-nut industry is compelled to pay for the extraction of paper from society; at least, it bears the immediate brunt of payment. However, even without yet considering the “partial equilibrium” problem of how or whether such taxes are “shifted” by the betel-nut industry onto other shoulders, we should also note that it is not the only one to pay; the consumers of paper certainly pay by finding paper prices raised to them.

What Rothbard is saying here is that every time the government buys something with money looted from the taxpayers, it necessarily drives up the prices of those goods, and prevents those resources from being used by the private sector for private purposes. So, every time the government buys a gun or an airplane, it makes guns and airplanes more expensive for the private sectors, as well as all the factors that go into producing those goods. Needless to say, in addition to driving  up prices, the government is also distorting the economy, as well as choosing winners (government employees, contractors, and suppliers) and losers (those not favored by the government). Whole industries — ones that were valued and profitable before the government got involved — can be destroyed in this manner; and the livelihoods of people with them. Rothbard goes on:

The process can be seen more clearly if we consider what happens when taxes and government expenditures are not equal, when they are not simply obverse sides of the same coin. When taxes are less than government expenditures (and omitting borrowing from the public for the time being), the government creates new money. It is obvious here that government expenditures are the main burden, since this higher amount of resources is being siphoned off. In fact, as we shall see later when considering the binary intervention of inflation, creating new money is, anyway, a form of taxation. [emphasis added.]

We're forced to conclude that any Republican veto of taxes, if not accompanied by a veto of spending, has accomplished nothing at all but to simply shift the burden on the taxpayers to some form other than a transparent tax bill. Indeed, one could argue that if the GOP is to agree to huge spending increases, as it recently did, it would be less dishonest to simply increase tax rates rather than seek political advantage by pushing the tax burden onto the public by the less obvious means of deficit spending.

And, even if the GOP found some magical unicorn-dust-method of paying for the extra spending without either ordinary taxes or money creation, the public would still suffer from the market distortions and price increases caused by the government's use of scarce resources.

So, the next time a politician pledges to cut taxes, be sure to remind him that if he really has an interest in freedom and free markets, he'll focus on cutting spending first. Then ask him which specific government programs he plans to cut. If he can't credibly answer the question — and if he doesn't do it once in office — you can be sure you've been had.

Image credit: frankieleon. 

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