Saturday, December 15, 2007

A Superficially Sensible Proposal

Cato's Tom Firey warms to the idea of raising taxes:
[R]eaders of this blog probably won’t like last weekend’s column [in The New York Times‘s “Economic View”], penned by Cornell economist Robert Frank. Frank argues that “realistic proposals for solving our budget problems must include higher revenue,” i.e., new taxes or tax increases. However, he says, those proposals are being blocked by “powerful anti-tax rhetoric [that] has made legislators at every level of government afraid to talk publicly about a need to raise taxes.”...

Frank has spent much of his academic career arguing for raising taxes on wealthier people so as to create greater income equality (some of his work can be found here, here, and here). It would thus be expected that a Cato analyst would bash Frank’s column like a piñata. But I believe there’s merit to what he writes....

Why have the tax cuts not slowed government growth? Because Uncle Sam is quite happy to borrow money. Frank points out that the national debt has increased $3 trillion since 2002, and it will likely rise an additional $5 trillion over the next decade. As NYU law professor Dan Shaviro notes in this 2004 Regulation cover story, that debt is future taxes....

This leads to the core problem of borrow-and-spend public finance: Because today’s taxpayers receive government services without paying the full cost, they (and their political leaders) are not forced to consider:

  • Is this service worth its cost?
  • Would we be better off if government spent its money differently?
  • Would we be better off if government did not tax that money away from us, but we instead spent it privately?

Instead, borrow-and-spend lets both the Big Government crowd and the Anti-Taxes crowd get what they want: the Big Government folks can keep expanding government and the Anti-Taxes folks pay lower taxes — for now.

That’s why there’s merit to Frank’s column — if we were to pay, today, the full cost of government, we’d give much more thought to the opportunity cost of government spending. I strongly suspect there’d be much less demand for government services and much stronger outcry against current spending and spending proposals....

So, Prof. Frank, I say bully for you! If we follow your proposal, I think we’ll move several steps closer to limited government.

Firey's argument makes sense if you read it quickly and uncritically. But three things are wrong with it. First, more borrowing today doesn't necessarily require a proportionate increase in taxes tomorrow. As I discuss here, the government's debt can rise interminably in a growing economy. (See also this and this for my views about the notion that government borrowing "crowds out" private investment.)

Second, tax increases usually mean higher marginal tax rates. ("Soak the rich.") But economic growth is financed and fueled by people at the high end of the income distribution, and by people who strive for the high end. Higher taxes = slower economic growth. It's as simple as that.

Third, higher tax rates won't change the political equation. Government spending comprises myriad specific programs, each with its own constituency (in and out of government). Voters and interest groups support politicians who promise (and deliver) specific programs that seem desirable (like the proverbial free lunch). Firey lists some of those programs:
Medicare Part D, the proposed farm bill, the latest round of energy subsidies, more and more corporate welfare, No Child Left Behind, and a whole new, giant federal agency
Would the supporters of Medicare Part D have backed off had they thought that taxes would rise in order to fund Part D? I very much doubt it. Despite the prospect of a tax increase, Part D would have yielded a net financial gain for its beneficiaries, psychic gains and political clout for the private interest groups that pushed it, a larger government bureaucracy (which is a plus, in Washington), and so on. In the perverse world of government, higher spending is an excuse for raising taxes. (Harry Hopkins, FDR's close adviser, is said to have put it this way: "We shall tax and tax, and spend and spend, and elect and elect.")

The real villain of the piece is the Supreme Court, for its failure to enforce the constitutional doctrine of limited and enumerated powers -- a failure that, in large part, can be traced to the New Deal era. The Court has allowed the federal government to do things for which the federal government has no constitutional mandate. Moreover, the unleashed federal government has fostered (through mandates and grants) the transformation of State and local governments from being providers of basic services (e.g., schools, streets, police, and courts) to being providers of a panoply of "social services."

In sum, the rise of big government cannot be traced to low taxes. It can be traced, instead, to the failure of the executive and legislative branches of the federal government to honor the Constitution, and the failure of the Supreme Court to enforce it.