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Home | Wire | How Much Does a Tax Cut Cost?

How Much Does a Tax Cut Cost?

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Tags Taxes and Spending

11/28/2017

People often speak of tax cuts using topsy-turvy lingo like this quotation from the Committee for a Responsible Budget: “the country currently spends $1.6 trillion per year on tax breaks.” Or, as The Hill claims: “GOP tax plan would cost $2.4 trillion.” Statements like these make it sound like a tax cut is something you have to buy — as in, you search Amazon.com for tax cuts, add it to your cart, and purchase it. Then your credit card is charged $2.4 trillion. This is very confusing and very common. With the Trump/Republican tax plan being discussed, this sort of language is everywhere.

Taxes are revenue for the government collected involuntarily from its citizens. Therefore, a cut in taxes simply means less non-consensual money is taken from taxpayers. It is not money changing hands from the government to citizens. Indeed, it is money not changing hands. A tax cut is lowering the rate of taxation, and similarly a tax expenditure is using exemptions, deductions, and credits to target particular situations for tax relief. George Reisman says:

…according to The Times, “Tax expenditures cost the federal government more than $1 trillion a year in lost revenue.”

When one recalls that in World War II, there was a 90-percent bracket in the federal income tax, and that the government has it in its power to impose such a tax rate on everyone but presently chooses not to do so, then it becomes clear that by the logic of the concept, the cost of tax expenditures to the federal government is not just $1 trillion, but many, many trillions. It is, in fact, everyone’s entire income and wealth.

Saying there is a cost for lower taxes is a rhetorical tactic meant to obscure what tax cuts really mean: less money for the government. However, it may feel like a cost for some vested interests.

The Cost of Tax Cuts

If cuts in taxes result in cuts to government spending, there are many groups who could bear a cost. When so many are dependent on government programs, politics becomes a bitter fight with high stakes. Thus, we have many varieties of “Hands off” slogans: Hands off my healthcare, Hands off my birth control (can be covered by Medicaid), or one of the most bipartisan, Hands off my Social Security. Because Social Security is “mandatory spending,” and workers “pay into it,” there is an even greater sense that it is “my” money. The deafening outcry over these programs being potentially cut may be understandable. On a human level, the pain and suffering would be very real for those the government has addicted to its services.

“Hands off my defense spending” is another popular one, although rarely phrased that way. A comparison of how much is spent on national defense reveals that military contractors have become skilled at keeping the “defense” money coming. The US spends by far more on its military than any other country — in fact, it spends more than the next 7 highest countries combined. As another example, the 4,000 warhead nuclear arsenal of the US is enough to decimate Libya, Syria, Iraq, North Korea, Iran, Russia, and China, and still have 2,897 warheads leftover for friendlier countries. The US spends billions each year maintaining this stockpile.

Taxes and Deficits

Sadly, the norm in recent history is for no adjustment of spending with tax cuts, and therefore many bring up concerns about the budget deficit. Indeed, this latest tax plan may very well result in a larger national debt. 

The national debt and spending are both deeply problematic. Instead of insisting, as most Washington policy wonks do, that the US raise taxes to eliminate the deficit, let’s consider the situation from a principled, moral point of view.

Suppose we have two immoral actions: taxation and out-of-control government spending. If taxation becomes less than government spending, it leads to an undesirable outcome: a budget deficit/higher national debt. But less taxation also means less of an immoral action (i.e., taxation) and less of an immoral action is a step in the right direction. What is the moral solution to this dilemma? Is it to increase the immoral action of taxation back in line with spending, thereby eliminating the deficit? No, the moral solution is to reduce the other immoral action (out-of-control spending). That way both immoral actions are reduced and the undesirable outcome is eliminated. 

And yet it’s always tax cuts and not the taxes themselves that get the blame. The Committee for a Responsible Budget continues: “the country currently spends $1.6 trillion per year on tax breaks — many of which distort economic decision-making and result in a misallocation of resources.” Tax cuts misallocate resources? What about government spending? It may be true that tax deductions, etc., might affect decision-making, but consider the following:

Say a thief breaks in to a woman’s house and takes a $1,000 in cash. The thief serendipitously has a change of heart and repents of his evil ways. He calls the woman on the phone telling her the location of the tree where he stashed her money. The woman goes to the tree to recover her money. She might not have planned to go to the woods searching for stolen money, but if she can retrieve what is rightfully hers she feels better off. Ultimately, it wasn’t the retrieval of her money that caused her change in behavior. The robbery was the cause.

Tax cuts, expenditures, loopholes, and other derogatory names for “less taxes” are necessary relief for free enterprise. Ludwig von Mises said “Capitalism breathes through those loopholes.” Murray Rothbard hoped that

… we can revive the lost tactic, not of "closing the loopholes," but of ever-widening them, opening them so widely for all indeed, that everyone will be able to drive a Mack truck through them, until that wondrous day when the entire federal revenue system will be one gigantic loophole.

Taxes themselves are an enormous cost to society. Cut them all.

Matthew Bankert (mattbankert.com) is a software developer and musician writing from Maryland. He converted to the freedom philosophy after reading Ron Paul’s book The Revolution in 2008.

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