Should we cut taxes or pay off the national debt?
What’s missing from this picture?
Aside from the fact that paying off the debt need not be a priority (there is no connection between the debt and economic growth), the question is a classic case of the Fallacy of the False Alternative.
If we accept for argument’s sake that the debt should be paid off at once, there’s a way to do it and cut taxes? And it doesn’t take magic. It’s really quite simple.
The way to do it is to (houselights out, drum roll, spotlights wash the stage):
Cut government spending.
Aside from a congressman or two, apparently none of your brilliant, highly educated, extravagantly paid, and securely tenured representatives in Washington—Republican or Democrat—thought of that. Kind of makes you wonder what you’re paying them to do, doesn’t it?
The federal budget is closing in on $2 trillion a year—nearly 20 percent of GDP. (Tax revenues are at a record 20.4 percent.) The government is so big, no one can possibly know all that it is doing. In the nation’s capital every nook and cranny has an office with federal bureaucrats ladling out your money to some favored constituency for things you’d never dream of spending your money on yourself.
And yet: every penny is apparently being so wisely spent that we cannot even consider cutting the budget, even for something allegedly so important as paying off the debt. Not only that, the 106th Congress, controlled by Republicans, thought too little was being spent. So they increased spending by even more than Bill Clinton had asked!
This is all just a bit too convenient. The taxpayers—remember them? the people who produce whatever the government has to spend?—can go without relief indefinitely. But do not ask the politicians, bureaucrats, and their dependents to forgo even a buck out of two trillion. Forgo? Heck, don’t even suggest they make do with what they had last year!
And let’s not hear yet again that everyone is for tax cuts, but responsible ones would be “targeted to those who need them.” Those aren’t tax cuts; that’s social engineering through the IRS.
There’s always a reason for not cutting taxes. A few months ago the reason was that it would overstimulate the booming economy. This is long-debunked Keynesian claptrap. Now that the economy isn’t booming quite so much, the story is that the tax cut will do nothing to stimulate the economy in time. We don’t need tax cuts: we have Alan Greenspan. When exactly is it time to let people keep what they produce?
The main reason to cut or repeal taxes isn’t economic—it’s moral. The money belongs to its producers. The taxpayer should get first—not nth—consideration. That is true in good times or bad. Full stop. End of paragraph. End of story.
Most Washington folks don’t see it that way. To them, cutting taxes is merely another form of government spending, competing with all the other forms of government spending. From this perspective, an income-tax cut that would “give” rich people—the same people who pay most of the income taxes—more money than poor people—who pay little or no income tax—is bad policy because the rich don’t need the money. (“To each according to his . . .”—well, never mind.)
The implications of this outlook are astounding. If cutting a tax is equivalent to spending that money, then it must be true that the government is also spending whatever money it does not now take from the taxpayers. After all, it could have taxed that money and used it in other ways.
In other words, the government’s real budget is the entire Gross Domestic Product of the United States—more than $9 trillion. The government owns all the income, but the amount it spends in the form of tax forbearance is subject to change at any time.
The big-government types who suddenly care about the national debt have dubious credibility. They don’t really care about it. It has value to them in only one respect: it can be used to stop tax cuts. Let me amend that. They have another reason to hate the debt. They drool at the social engineering they could be doing with the money—about $200 billion a year—that now goes to paying interest.
And that means there’s a darned good reason to maintain the debt. During the Reagan years, when the government was running up record deficits by outspending the revenue gusher, no one could seriously propose big new spending programs without being dismissed as out of touch with reality. When F. A. Hayek visited in Washington in the early 1980s he told the Washington Post that this was the strategy explained to him by Reagan budget director David Stockman. Whether or not that was actually the strategy, deficits had a blessed chilling effect on those who live by spending other people’s money. Surpluses have the opposite effect.
Clearly, we taxpayers cannot afford surpluses.
We need not feel guilty about not paying off the debt. The holders of debt aren’t complaining. Also, we are not “stealing from our children,” as conservatives used to say. For one thing, you can’t steal what won’t be produced until many years from now. Moreover, government borrowing consists not of an intergenerational transfer of wealth, but of two separate intragenerational transfers. When the debt is first incurred, money goes from creditors to government workers, dependents, and contractors. When the debt is paid, money goes from taxpayers to bondholders, overlapping groups.
Thus, while it is true that government borrowing—especially repayment—is a form of coercion, it is little different from other forms of government coercion. There is certainly no reason to prefer other forms over this one. On the contrary, interest payments are less mischievous than other forms of government spending.
So let’s bring back deficits and protect the debt. The economy can do just fine with them. Interest rates are higher now than when we had deficits in 1993. (See Russell Roberts’s “Don’t Fear Deficits” in the December 2000 issue.)
But not all deficits are equal. It would be a mistake to create one by raising spending. Let’s cut spending, but create deficits by cutting taxes—big time.
To that end, I proclaim the founding of the Committee to Restore the Deficit through Tax-cutting (CRDT, pronounced “credit”). Like the venerable Nockian Society, there’ll be no dues, meetings, or officers. All you have to do is recite the motto: Tax Cuts Now—Debt or No Debt!
There, you’re a member. Now get out there and find new members.