Freeman

ARTICLE

Government Spending Must Be Cut

DECEMBER 01, 1978 by HANS SENNHOLZ

This article is reprinted by permission from the September 1978 issue of Private Practice.

The case for lower taxes is clear and compelling. Projected federal expenditures total nearly $500 billion in fiscal 1979 and the budget deficit is expected to exceed $50 billion. Government spending has risen to the point where its burden is felt throughout the American economy. The three sources of government revenue clearly reveal the strain:

1. For many taxpayers the levies are higher than ever before, giving encouragement to tax evasion and outright rebellion.

2. The capital markets show signs of utter exhaustion from government demands, causing interest rates to rise and security prices to fall. There is moaning among stockholders and bondholders, whose savings have been devastated in recent years. But in the body politic they are outnumbered and outvoted and, therefore, constitute no threat to the politicians in power.

3. Inflation, the favorite technique of deficit financing, is accelerating again, reducing the real earnings and savings of millions of people. It is potentially more dangerous to the deficit spenders who are resorting to currency and credit expansion in order to finance their favorite programs. But the spenders continue to hide behind the wall of public ignorance that permits them to put the blame for rising prices on merchants and industrialists, on physicians and dentists, on anyone and anything making the news.

The Burden

The public is aware, however, that the tax burden continues to grow. Some taxpayers are saddled with levies that are greater than ever before. They are pleading for tax relief and, in many cases, are organizing for tax protest and rebellion. Many victims have reached the limit of their endurance. Others are submerging in the “subterranean economy,” where economic transactions are financed by cash and earnings remain unreported. According to some estimates, more than $175 billion of annual income, or $3,000 per family, are escaping the IRS bite. And this amount is expected to grow as inflation lifts everyone’s income into progressively higher income tax brackets.

Moral Strength

Surely, we feel with the countless victims of government spending that consumes more than one-third of national income. We understand their anguish and sense the enduring morality of the cause of self-defense and man’s right to the fruits of his labor. But we doubt that their cause embodies the moral strength for overcoming the spending aspirations of contemporary society. It is haunted by self-interest and projects self as the central figure on the cause of tax rebellion, while government spending continues to draw its political strength from a loud concern for the poor and underprivileged.

Progressive income taxation in itself is an objective of policy in search of social and economic equality. But it is also an inevitable consequence of a social order that bestows expensive benefits on millions of beneficiaries. After all, government has no sources of income and wealth of its own. It depends entirely on its ability to extract the means from its subjects. It must find victims in order to satisfy the clamor for social benefits and programs, government functions and services.

The tax rebellion is a viable political force, but it can become a moral force only with a simultaneous renunciation of the claims to benefits. The public agitation for lower taxes found powerful expression in the overwhelming acceptance of Proposition 13 by California voters—a referendum slashing real property taxes. The California voters gave new life to many other campaigns to secure reduction in federal and state tax rates. But such campaigns skirt the real issue if they focus exclusively on tax reductions. An essential ingredient of genuine relief and a truly successful tax rebellion is a reduction in the size of government. Without it, a tax rebellion could merely result in changes in form that in the end lack substance. It merely would shift the burden of government from some taxpayers to other victims.

Tax Cuts or Spending Cuts?

Some campaigns focus on the potential for increasing government revenue as a result of tax cuts. The Kemp-Roth proposal seems to suggest that no spending reduction is needed as a companion to tax cuts. Its advocates hold out the hope that their particular tax cuts will revive the economy, cause it to expand, compensate for the loss of revenue with new revenue, and simultaneously reduce the relative size of government. They are promising relief for taxpayers, more jobs to workers, higher profits to businessmen, and more revenue to social spenders.

It may well be true that cuts in certain tax rates would spur economic activity and generate increases in revenue despite the tax cuts. A reduction in the capital gains tax, corporate income taxes, and other levies on capital and business undoubtedly would stimulate economic production. But it is unlikely that the relative burden of government would be permitted to shrink. The temporary loss in tax revenue would immediately be offset by revenue from the capital market, causing interest rates to rise and business activity to contract, or from currency expansion, that is, inflation, causing prices to rise. If, nevertheless, the net effect should be expansionary, government, too, will expand. It may even grow faster than the private sector if the deficit is financed by inflation. Would the political forces pushing for economic redistribution and more government acquiesce in a smaller share of national income? They managed to extract their present share of benefits from a stagnant economy. Is it not likely they would want an even larger share from an expanding economy?

There is no easy escape from the consequences of an ideology of economic transfer and social conflict. A tax cut as a stimulant administered by government surely does not weaken the position of government. It does not even question the transfer function, but instead adds the role of economic stimulator. A tax cut that is accompanied by a spending cut does effectively reduce the burden and size of government. Therefore, explicit limits on government spending are needed to lend substance to a proposal for tax reduction.

The Root of the Evil

It takes great political courage to confront the root of the evil: the appetite for government services and benefits. Most Americans still believe that government owes them certain favors, such as income security, public housing and urban renewal, free education and medical care, and so forth. Their call for benefits is an implicit demand that financial means be seized from others. They would not be asking for social programs if they were expecting to cover the costs in proportion to benefits.

Few Americans seek no government favors, and even fewer openly reject them on moral grounds. It is much more popular to seek and accept the benefits of redistribution while objecting to the taxation that covers their costs. Most people freely partake in the economic redistribution, but loudly oppose the necessary allocation of costs.

Most professors, for instance, live comfortably on government funds from state colleges and universities, seek federal grants and scholarships, send their children to public schools and colleges, while all along bemoaning their income taxes. They consider the things government does for them as social progress, but decry heir tax burdens as oppression and abuse. Similarly, most physicians applaud their own benefits as social justice, but lament their tax burdens as social injustice. They accept the principle of redistribution and endeavor to get “their share” of benefits, but bitterly oppose their allocated share of costs.

Social Conflict

A political society that engages in economic redistribution is torn by social conflict. The beneficiaries seek to impose even more levies and restrictions on the victims, who in turn clamor for their share of benefits and lament their obligations and Charges. The bitter struggle is waged in the political arena with ever shifting forces and alliances. Victories or reverses are merely temporary, to be followed by new offensives and counter-offensives in a perpetual war for social benefits. To restore social peace and effect a rebirth of freedom, we must cease from preying on each other through government.

***

The Power of the People

The prescriptions in favor of liberty ought to be leveled against that quarter where the greatest danger lies, namely, that which possesses the highest prerogative of power. But this is not found in either the Executive or Legislative Department of the Government, but in the body of the people, operating by the majority against the minority.

JAMES MADISON

ASSOCIATED ISSUE

December 1978

comments powered by Disqus

EMAIL UPDATES

* indicates required

CURRENT ISSUE

December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
Download Free PDF

PAST ISSUES

SUBSCRIBE

RENEW YOUR SUBSCRIPTION

Essential Works from FEE

Economics in One Lesson (full text)

By HENRY HAZLITT

The full text of Hazlitt's famed primer on economic principles: read this first!


By FREDERIC BASTIAT

Frederic Bastiat's timeless defense of liberty for all. Once read and understood, nothing ever looks the same.


By F. A. HAYEK

There can be little doubt that man owes some of his greatest suc­cesses in the past to the fact that he has not been able to control so­cial life.


By JEFFREY A. TUCKER

Leonard Read took the lessons of entrepreneurship with him when he started his ideological venture.


By LEONARD E. READ

No one knows how to make a pencil: Leonard Read's classic (Audio, HTML, and PDF)